EU Readies for More Social Debt After Wild Success of Debut Sale

The European Union is seeking to build on record-breaking demand for its social bonds by exploring appetite for a second wave of the debt.

The EU has sent banks a request for pricing and strategists predict a sale as soon as next week. Although orders aren’t expected to match last month’s levels, they should still be well above 150 billion euros ($175 billion), according to Jens Peter Sorensen, chief analyst at Danske Bank A/S.

The sale in October marked the EU’s first joint debt since it reached a landmark pandemic recovery deal, and heralded the arrival of a major safe asset. The level of demand took some strategists by surprise, with orders reaching more than 233 billion euros, leaving investors on alert for the next round of issuance.

“Markets are preparing for the new bonds,” Sorensen said, adding that he expects the sale to raise 13 billion euros for the EU’s SURE jobs program, which is targeting over 30 billion euros of issuance this year. He predicts seven- and 30-year debt to be sold through banks next week, given the U.S. election will be held on Tuesday.

Social bonds target projects that help society, such as improving social welfare or serving disadvantaged populations. Yields on 10- and 20-year social bonds, which raised 17 billion euros, have tumbled 12 basis points and 10 basis points respectively since their debut late October. That compares with a two-basis-point drop for German bond yields.

Coming Soon

“If we get an orderly market reaction to the U.S. election result we may well see new EU bonds within the next few days,” said Peter McCallum, rates strategist at Mizuho International Plc, adding that five- and 30-year may be sold.

Demand for European debt has hit all-time highs this year. The bloc aims to sell as many social bonds as issued globally so far. The market is rapidly expanding, with last month’s deal taking sales up five-fold this year to around $90 billion.

Offerings through banks are more expensive than auctions, because borrowers pay a premium to ensure that the bonds are sold. But the method has proved a popular way to sell large amounts of debt.

©2020 Bloomberg L.P.

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