EU draws curtain on first act in pandemic bond-sale splurge
The European Union is about to complete bond sales for its regional jobs program, widely considered a warm-up act to a landmark borrowing spree that's due to start in the second half of the year.
The bloc is set to sell eight- and 25-year securities on Tuesday to help finance its so-called SURE package of loans for member states, capping around € 76 billion euros ($92 billion) of issuance so far.
The EU's first major foray into global debt markets has been a huge success, with orders last year breaking records, buoyed by the bloc's top-bill credit rating and the European Central Bank’s bond purchases.
"The first few EU SURE syndications were a smashing success in terms of demand," said Martin van Vliet, a strategist at Robeco.
"There will be structural demand for triple AAA paper such as the EU, so the recovery fund issuance will be digested, but we’re not sure demand will be as astronomical."
It bodes well for the EU's flagship recovery fund, which will see the bloc issue € 800 billion of debt over half a decade to fund fiscal stimulus across member states.
That's equivalent to the size of Spain's entire bond market, a test of investor appetite for securities that some say could even serve as a new haven asset to rival US Treasuries.
Yet with the market in the throes of a reflation-fuelled selloff and investors preparing for the ECB to begin tapering its bond-buying program later this year as the pandemic recedes, there are concerns over how well future offerings will be absorbed.
In a sign of waning demand, the yield on 10-year SURE bonds has climbed more than 40 basis points since they were issued in October.
The bond sales are ready to start by July, according to the European Union, though all member states need to have ratified the program by then.
The Commission announced Monday that it would use an auction system operated by France's central bank to issue debt later in the year, relying on syndications in the meantime. Sales are expected to average around 150 billion euros per year for the duration of the program.
Still, EU bonds will outperform "core" European sovereign peers because investors face a serious shortage of notes in both the short- and long-term, Commerzbank AG analysts wrote in a note to clients last month. Any attempt to extend the size of the package is likely to be politically difficult, they argue.
The EU mandated Deutsche Bank AG, LBBW, Morgan Stanley, Natixis SA and NatWest Markets for the sale of SURE bonds. Commerzbank expects the EU will sell as much as 15 billion euros of bonds.
Elsewhere, government bonds are starting to see demand ebb, with German 10-year bond yields climbing to their highest level since 2019 last week. Goldman Sachs Group Inc. expects them to breach 0% for the first time since 2019 this year. Italian 10-year bond yields rose to the highest level since July on Monday as investors speculated an economic growth rebound could mean less central bank support.
"Over the last couple of weeks things have definitely turned more challenging," said Christoph Rieger, head of fixed-rate strategy at Commerzbank. "Lower ECB buying may require somewhat higher premiums."
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