Hypo Noe was able to limit the new issue premium on a €500m 10 year covered bond to just 1bp today (Wednesday) in a move tighter for the primary market, but a drop in book size to €600m as the spread was tightened was seen as indicating an ongoing need to “handle with care”.

Following a mandate announcement yesterday (Tuesday), Hypo Noe leads BayernLB, Crédit Agricole, Erste, LBBW and RBI this morning opened books with initial guidance of the mid-swaps plus 8bp area for the €500m no-grow June 2031 covered bond, rated Aa1. After around 50 minutes, they reported books well above €600m, excluding joint lead manager interest, then after around one and three quarter hours revised guidance to 5bp+/-1bp, will price in range, on the back of books well above €800m, excluding JLM interest. The spread was then fixed at 5bp on the back of more than €630m of orders, excluding JLM interest, pre-reconciliation, and the final book was ultimately put at more than €600m, including €25m JLM interest.

A syndicate banker away from the leads said he was surprised the issuer had not been able to achieve a tighter outcome.

“I would have started in more or less the same camp,” he said, “but maybe my market assessment was too punchy as well.

“I guess it’s still a ‘handle with care’ market to some extent.”

Hypo Noe’s deal is the first euro benchmark in over a week, with issuers in the past month having had mixed degrees of success in tapping the market as it recovers from a correction that started a month ago.

“They had a book of above €800m, but then it crumbled, which wouldn’t have been what they’d have hoped for,” added the syndicate banker. “That said, it was oversubscribed in the end.”

A lead syndicate banker nevertheless said that “a big positive” could be drawn from the execution of the Austrian trade.

“Yes, you can argue that the overall size of the book is not that great,” he said, “but that is a reflection of the overall covered bond market, where investors are waiting to rediscover their enthusiasm.

“There is still price sensitivity, as we saw from the drops, but we are pricing extremely close to fair value.”

Hypo Noe’s longest outstanding benchmark, a June 2027, was quoted at 3bp, mid, according to pre-announcement comparables circulated by the leads, and the syndicate banker put fair value at 4bp.

“We were just 1bp back of that, which is a bit tighter than what we have seen in the past two to three weeks,” he said. “What that tells you is that the market is probably a little better than where we were earlier this month.”

The improvement in pricing had been helped by a rally in the SSA sector, according to the lead banker. The EU yesterday sold its first NextGenerationEU (NGEU) bond and the €20bn 10 year deal was priced at mid-swaps minus 2bp, meaning Hypo Noe’s 10 year offered a 7bp pick-up – when Raiffeisen-Landesbank Steiermark struggled to sell a €500m 20 year covered bond a month ago, its spread of plus 7bp was 10bp inside where a €6bn 25 year EU SURE trade was priced the same day, at plus 17bp.

“When the SSA market comes back and is in better shape, that is helpful for the covered bond market, too,” said the lead banker.

Covered bonds nevertheless remain wider than they were a month ago, with Hypo Noe’s outstanding June 2027s, for example, having widened around 3bp over the period.