Milestone issuance of European Social Bonds

The European Union is accessing the primary market today with large-scale bond issues to fund its crisis management efforts.  The first Social Bonds in the history of the European Union are meeting enormous market demand.  The order book for two tranches with maturities of ten and twenty years exceeds 233 billion euros, and a total volume of 17 billion euros will be printed later on today.
Christian Kopf

 

An article by Christian Kopf

Head of Fixed-Income Fund Management and 
member of the Union Investment Committee (UIC)

“This is the first time the European Union has accessed the capital market since agreement on the Next Generation EU recovery effort was reached at the EU crisis summit in July.  Issuance proceeds will be lent on to member states of the European Union to fund their efforts in overcoming the Coronavirus crisis.  Today’s bond issues will be used for the EU's SURE programme, which aims to safeguard jobs and prevent unemployment in EU member states.

Today’s financing exercise also marks the arrival of a new, large-scale issuer with a top-notch rating in the European government bond market, which is a milestone in the history of capital markets.  We expect the European Commission to become a major player on the capital market in the years to come, with an aggregate issuance volume of up to 850 billion euros by 2026.  This total size can be reached, even if some member states decide not to draw on loans from the European Union.  Germany, for example, will likely choose to fund public expenditures directly, since the Federal Republic can access capital markets at even more favourable rates.

If the European Union’s total stock of government bonds does rise from the current level of around 52 billion euros to around 850 billion euros in the coming years, it would become the fifth-largest issuer in Europe, just after Spain.  Making this large-scale bond issuance as predictable as possible could be achieved by creating a debt management office for the European Union. Institutional investors require transparency regarding the issue dates and the volume and maturities of planned bond issues.  We would very much welcome it the European Commission potentially could developing an auction mechanism to place its bond issues, as a complement to bank syndication. 

In addition, we view the social bonds issued by the European Union as an interesting opportunity for sustainability-minded investors.  The new issues have a Triple-A rating from all major rating agencies and will likely offer a yield pick-up over securities issued by the European Stability Mechanism or the European Investment Bank, as well as a higher yield than government bonds issued by the EU member states with comparable ratings.  Funds raised via EU social bonds are strictly earmarked for their stated purposes.  Investors’ money will flow into specific projects, under the supervision of the European Commission.  The EU’s social bonds are therefore an important addition to the market for sustainable bonds, which is has so far been dominated by green bonds.”

 

As at 20 October 2020