A EUR750m eight year covered bond for KBC illustrated the vacillating character of demand in prevailing market conditions when it was slow to attract interest and was tightened only 1bp today (Thursday), despite offering a reasonable new issue premium, leaving bankers scratching their heads.

Only yesterday the Netherlands’ de Volksbank priced a twice-subscribed EUR500m 10 year issue, tightening pricing some 3bp during bookbuilding to offer a new issue premium of 2bp-3bp. The exercise followed a template established in successful benchmarks for BPCE and Nordea last week, which achieved improved outcomes versus preceding deals by offering more generous new issue premiums, particularly as a starting point.

At first glance, KBC’s planned new Belgian benchmark-sized eight year deal this morning appeared to match these qualities, offering a starting new issue premium of around 5bp with initial guidance of the 7bp through mid-swaps area, according to a banker at one of leads BayernLB, DZ, KBC, LBBW, Natixis and UBS.

However, a first update was not provided until some 90 minutes after the books were opened, quoting orders well above EUR800m, including EUR80m joint lead manager interest. Another hour later, books were said to be well above EUR1bn, and the size was set at EUR750m and guidance revised to minus 8bp, plus or minus 1bp will price within range. The spread was fixed at minus 8bp another hour later with orders totalling around EUR1.1bn pre-reconciliation, including EUR100m JLM interest, and the books closed shortly thereafter.

“It took us a little bit longer than we probably would have expected,” said another lead banker. “Apparently it’s a market that’s difficult to read.”

“However, EUR750m at minus 8bp is still a decent result.”

Another lead banker said that the book was high quality, but that investors were price sensitive.

“The issuer is trading at very, very expensive levels,” he said, “and accounts are just seeing less value at these tight valuations.”

He also noted that the deal had been executed against a backdrop of equity market weakness and with the Bund rallying as much as 50 ticks during the day.

The other lead banker said that it is hard to understand market dynamics.

“It works on Wednesday but doesn’t work on Thursday, and on Monday everything may be smelling of roses again,” he said. “The factors that have proven supportive of the market remain the same – notably the ECB – but they appear to have lost their lustre.

“There seems to be an underlying fear that rates will be rising and even if spreads are stable, there isn’t the same reliable appetite.”