EU begins selling first bonds to fund $1tn stimulus

The EU is testing investors’ appetite to fund nearly $1 trillion of debt over five years as it seeks to finance its recovery from the coronavirus pandemic.

The bloc opened books on debut 10-year bonds as part of its NextGenerationEU (NGEU) programme, which will finance grants and loans to member states. European Central Bank President Christine Lagarde said in an interview published on Monday the NGEU stimulus will “transform the future of Europe”.

The bonds are being offered with initial price thoughts wider than the EU’s existing debt curve, according to data compiled by Bloomberg, and is likely to price on Tuesday. Commerzbank strategists expect the size of the sale to exceed €10 billion ($12bn).

EU debt tied to its separate and smaller SURE programme has underperformed as investors brace for a wave of supply in the coming months, with the bloc looking to raise €100bn in long-term bonds this year alone. The 10-year SURE bonds are trading near their widest spread to equivalent German debt since their issuance in October.

“We’re taking a look and will probably buy,” said John Taylor, a money manager at AllianceBernstein, noting the bond’s attractive pricing compared to French securities, in particular.

The EU will conduct three syndicated NGEU bond sales before the August summer break, it said in an investor call last week. The NGEU green bond framework will be published by September after which sales can begin, with almost a third of the plan’s roughly €800bn to be in green debt.

Morgan Stanley expects NGEU bonds will trade at a slight discount to their SURE peers, given the latter’s ESG label, as well as the premium associated with the wider investor base, strategists including Alina Zaytseva wrote in a note.

Yields across the region have risen in recent months with economies reopening and consumer prices expected to accelerate, dampening the appeal for SURE debt. Still, the scale of the NGEU issuance has led the securities to be touted as an eventual rival to US Treasuries in the longer term, given the current scarcity of German bonds – the region’s safe haven asset – and the higher risks associated with holding peripheral debt.

“A decent new issue premium on top of cheapened levels versus swaps and French bonds of late should ensure that NGEU gets off to a successful start,” said Commerzbank strategists including Rainer Guntermann in a note on Monday. The transaction size may be large “given the EU’s heavy workload until year-end”, they said.