xysoom
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Joined: 26 May 2020
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| Posted: 25 July 2020 at 11:25 | IP Logged
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European Rescue Fund Creates a New Big Beast in Bond
Market
Congratulations to the European Union for agreeing a
groundbreaking deal to distribute 750 billion euros ($864
billion) of grants and loans among its 27 members to
bolster the recovery from the pandemic. Now it has to
find a way to pay for it. And bond investors are ready,
willing, able and eager to help.To get more news about
WikiFX, you can visit wikifx news official website.
Step forward an oven-ready vehicle already used by
the European Commission, which already borrows in the
name of the EU to satisfy centralized funding needs in
the bloc. The Commission can tap the highly liquid bond
market to pay for the rescue fund, with the financing
spread out over the next seven years in line with the EU
budget framework. The actual debt maturities will be much
longer and will be spread out across the yield curve,
allowing for a lot of flexibility to adjust bond sales to
wherever investor demand is strongest.
Austria‘s recent successful issue of its second 100-
year bond illustrates there’s investor appetite for
high-quality assets offering any hint of a yield — or
even something whose rates aren‘t as negative as other
European benchmarks. It also suggests that there’s no
upper limit on how long-dated EU bond issues can be,
although as markets enter the summer quiet period, it
will be wise to tread carefully in assessing investor
interest. It will likely initially issue in more liquid
maturities such as 5- or 10-year terms before selling
longer-dated bonds.
Before long, EU debt will be totally interchangeable
with the other liquid sovereign debt issued by European
countries. It will become part of the capital markets
furniture.
With the European Central Bank‘s bond-buying program
hoovering up so much of the German bund market, investors
are sorely in need of a so-called safe asset. EU debt
fits the bill, with credit ratings of AAA from Moody's
Investors Service and AA from S&P Global Ratings. The
existing market for EU-issued debt issued is small, at
just 51 billion euros, of which almost 10 billion euros
matures next year, so a boost in supply will meet a need.
Annual issuance is in line to increase by 150 billion
euros or more, roughly equivalent to a large European
country’s needs.
Moreover, with the euro zones benchmark debt yields
in deeply negative territory — investors pay about 44
basis points for the privilege of lending to Germany for
a decade — the premium offered by EU bonds gives
bondholders some relief, albeit still at yields below
zero. And the new pandemic bond issues might well offer
positive yields given their vastly bigger size and the
need to keep them attractive.
 23/637311262972050251/ART637311262972050251_273200.jpg-
wikifx_articlepic">
And the prospect of a massive increase in the supply
of EU bonds hasnt frightened the horses. The most recent
issue in its name, 500 million euros of 15-year bonds
sold at the beginning of last month, has steadily
improved in value, driving the yield down to just below
zero from an initial level of about 0.2%.
EU debt is already the closest thing to a common bond
that exists in the bloc. Needs must: Germany has overcome
its mistrust of debt mutualization in its desire to keep
the union intact and sanctioned a flood of securities
that are euro bonds in all but name. The rescue package
may not meet the definition of a Hamilton moment, but it
marks a true turning point in the EUs relationship with
the capital markets.
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Topic: European Rescue Fund Creates a New Big Be
