(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

MILAN - Investors flocked to the maiden issue of the European Union’s 800 billion euro joint funding programme on Tuesday. But the yield, which is higher than equivalent German debt, means common EU bonds aren’t yet the bloc’s safest asset. That will change over time.

Demand for the 10-year note, the first issued as part of its post-pandemic recovery plan, was a near-record 142 billion euros, Reuters reported. The bloc offered 20 billion euros of debt, twice the size it had initially earmarked, at a yield of 0.06%. That’s 30 basis points higher than the equivalent German government bond, which yields minus 0.24%.

The implication is that EU bonds aren’t as sound as Berlin’s. That may come as a disappointment for policymakers who have been pushing for a common European “safe asset”, which could help break the link between troubled banks and governments while also strengthening the euro’s international standing.

There are two chief reasons for the higher yield. First, the EU is not a sovereign state but a supranational entity. The bonds are backed by the EU budget, which countries must honour even if, like Britain, they decide to quit. But there’s still the lingering possibility of a messy departure.

The second element is liquidity. The EU programme runs until 2026, implying around 150 billion euros of new debt per year. That’s about half the amount Berlin expects to sell in 2021, which comes on top of almost 1 trillion euros of existing bonds. The thinner EU market, which makes it harder to sell at a good price, means investors require a higher interest rate.

Both elements will change. As Brussels continues to fund its pandemic “Marshall Plan”, the EU debt market will grow deeper, eroding the liquidity premium. Also, if the recovery plan helps member states to emerge from the current crisis, investors’ confidence in the EU project will increase. The bond issued on Tuesday already trades at a discount to the weighted average of EU notes, which traders say is around 0.15%.

Narrowing the yield gap requires time, and a lasting political commitment. But eventually, common EU bonds will take the shine off German ones.

 

CONTEXT NEWS

- The European Union received over 142 billion euros of demand for the inaugural 10-year bond backing its recovery fund programme, Reuters reported on June 15. The bloc is set to raise about 20 billion euros of debt from the sale, compared with initial estimates of 10 billion euros.

- The new bond will price at 2 basis points below the mid-swap rate, Reuters reported citing a lead manager on the deal, equivalent to a yield of around 0.06%. That’s a higher yield than the EU’s October 2030 SURE bond, which trades at between 5 and 6 basis points below the mid-swap rate.

- The EU plans to issue up to 800 billion euros of common debt between now and 2026 to back grants and loans to help member states rebuild their economies after the pandemic.

- It has already issued 90 billion euros of joint bonds via its SURE programme, aimed to fund pandemic-linked employment schemes.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | Editing by Liam Proud and Oliver Taslic) ((lisa.jucca@thomsonreuters.com ; Reuters Messaging: lisa.jucca.thomsonreuters.com@reuters.net))