EU Targets $36 Billion Social Bonds This Year After Record Deal

(Bloomberg) -- The European Union smashed global records on its first sale of social bonds this week and it’s not wasting any time in planning to offer more.

The bloc’s sales should total 30 billion euros ($36 billion) this year, just the first salvo in over 900 billion euros of total issuance by 2026, the EU’s Budget Commissioner Johannes Hahn said Wednesday. That followed the “huge success” of a deal racking up the biggest orderbook in history Tuesday, with 233 billion euros chasing its initial social bonds.

Now the question is whether demand for the EU’s joint securities will extend beyond this niche market, the fastest growing part of sustainable finance. Similar levels of interest for its conventional and green bonds, due from next year, could mean the assets may rival U.S. Treasuries on the world stage.

There’s a “new sheriff in town,” wrote Commerzbank AG strategists Michael Leister and Cem Keltek in a note to clients. “Euro bond markets are adding another chapter to the history books.”

With this week’s 17-billion-euro deal alone, the bloc has managed to finance nearly a fifth of its pandemic job-support program. Nearly two-thirds of those who snapped up the bonds were ESG investors, specializing in sustainable debt. Among the others was John Taylor, a money manager at AllianceBernstein, who saw an attractive alternative to national markets.

On top of that, the European Central Bank is able to buy up to 50% of the bloc’s issuance starting Friday, more than for national markets, providing a guaranteed backstop. Central banks and official institutions made up 37% of the buyers for the 10-year bond, with most investors from Europe.

“Investors look at the quantitative-easing commitment and are expecting that it gets extended,” he said.

That policy support will also cover the rest of the EU’s bond issuance, the bulk of which is set to start next year, should member states sign off on the details of a proposed 750-billion-euro recovery fund. Success would deepen its economic integration by sharing debt burdens that have been fractured along national borders up to now.

These are just among the latest factors helping build confidence in the bloc’s stability and assets, according to Peter Chatwell, head of multi-asset strategy at Mizuho International Plc. He sees the joint debt issuance helping the euro climb to a six-year high of $1.30 in 2021, from around $1.1860 currently.

“Europe has an extremely cheap currency, a much improved fiscal framework and pseudo fiscal union, a central bank which now understands the importance of its monetary policy in reducing euro-area imbalances, and it now has a bond market which is growing in size,” said Chatwell.

Borrowing Costs

Pacific Investment Management Co.’s Konstantin Veit, senior portfolio manager in European government bonds, said these new EU securities look set to trade at a similar level to France’s debt, considered a relative haven within the region’s bonds. France is effectively paid to borrow from markets, with a 10-year yield of minus 0.31%.

Such levels being extended to joint debt could ease one of the biggest problems in the euro area -- that the region’s most indebted nations have to borrow at the highest costs. Investors fear that they could one day tumble out of the euro area, creating strong demand for scarce German debt, widely seen as the bloc’s safest assets.

Yet since the pandemic lockdowns in March, bonds from Europe’s periphery have surged thanks to the ECB’s asset buying and the prospect of the recovery fund. Yields on Spanish and Portuguese 10-year securities now hover just above 0%, while those on their Italian peers touched a record low last week. Even Greece -- rated junk -- can borrow at less than 1%.

The temporary EU effort to raise debt to deal with the coronavirus is expected to become permanent as time goes by, said Peter de Coensel, a money manager at Degroof Petercam Asset Management SA in Brussels.

The key challenge for the EU now is how to build out a deep enough market across a range of products, including conventional bonds, green securities and social assets. Union Investment’s head of fixed income Christian Kopf suggested that it may need to conduct auctions and build up a debt management office in much the same way that nations do.

“We view the EU as a euro rates benchmark name for the future,” said Mizuho’s Chatwell.

©2020 Bloomberg L.P.