EU Bonds: A safe haven for institutional investors?

The first two bonds to combat the Coronavirus pandemic were launched on October 20th, 2020, with great success: investors wanted to invest a total of $275 billion (€233 billion) in these bonds. Securities worth $20 billion (€17 billion) were placed on the market. The securities were thus more than 13 times oversubscribed – a record for bonds issued in the eurozone.

With this issue, the EU Commission had taken the first step towards playing in the top league on the international capital markets, commented EU Budget Commissioner Johannes Hahn. “The fact that the bonds were social bonds helped to stimulate the interest of investors who want to support the member states in securing jobs in these difficult times,” said Hahn.

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EU bonds to secure employment

The Commission had issued the social bonds under the “Sure” instrument. The funds are to be used to secure jobs. The loans are intended to help the member states to cover costs arising from national short-time working schemes and similar measures.

Brussels issued two EU bonds: One with a term of 10 years for $11.8 billion (€10 billion) and one with a term of 20 years for $8.3 billion (€7 billion). The oversubscription was reflected in favorable conditions: the 10-year bond was quoted at 3 basis points and the 20-year bond at 14 basis points above the mid-swap rate. The final new issue premium is estimated at 1 and 2 basis points for the respective tranches, the Commission said.

EU bonds with good ratings

According to Franklin Templeton, the successful market placement demonstrates the interest of institutional investors in ESG-compliant investments. The COVID-19 pandemic has further increased attention to this topic. Although regional bonds have been issued in Europe before, these new social bonds represent the first EU-wide issue. The plus point: the bonds are of high quality with AAA ratings from various rating agencies. “We believe that many investors both inside and outside Europe will buy these bonds to diversify individual country risks,” said David Zahn, bond expert at the asset manager. In view of the good rating, the securities should serve as a safe haven in the future

A second, larger tranche should follow in the first half of 2021, according to EU Budget Commissioner Johannes Hahn

According to information from the EU Commission, EU Sure bonds with a value of up to $118 billion (€100 billion) will be issued as social bonds. For this purpose, an independently assessed framework for social bonds has been set up. Investors should be given security that the collected funds really serve a social cause.

This announcement followed the Council’s approval to provide financial assistance to 16 member states under the “Sure” instrument to protect jobs and workers. The funds raised are disbursed as loans to the Member States. The federal states are to be supported with the funds to cover costs that arose from the financing of national short-time working regulations and similar measures in response to the corona pandemic. Certain health-related measures – especially in the workplace – can also be financed through Sure.

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(Featured image by Capri23auto via Pixabay)

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