The EU issues bonds, but markets responds poorly

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On Tuesday, the European Union issued bonds that will complement the extensive funding to support the SURE unemployment scheme. However, the bonds enter a market that is not in the best condition as government bond yields are at multiple-month highs. The EU has offered so-called social bonds with maturities of eight and 25 years and will receive €14.1 billion from their sale, Reuters reported.

The SURE program is a temporary instrument and its purpose is to prevent massive redundancies in emergencies. It is intended for the member states that need to mobilize huge financial resources to combat the negative economic and social impacts of the spread of coronavirus on their territory. In the form of loans from the EU, it will be able to assist with up to €100 billion (over 2.5 trillion Czech korunas) to affected member states to help them deal with the sharp increase in spending to maintain employment.

The EU planned to raise €13 billion to €15 billion out of the total €19 billion that can still be drawn from the SURE program in the second quarter. In the end, however, it secured €14.137 billion through sales, according to data from Refinitiv.

The Union is selling bonds at a time of massive sell-off of euro-area government bonds. Behind it is speculation that the European Central Bank (ECB) could slow down bond purchases introduced due to the pandemic, as well as concerns about Italy’s ability to push through economic reforms as planned. Italy is one of the most indebted countries in the eurozone, and Monday’s sale raised Italian bond yields to a maximum in more than eight months. Revenues move in the opposite direction to prices — so when prices fall, revenues increase.

Christoph Rieger, who heads the team at Commerzbank’s rate and credit research, considers the current situation for SURE bonds to be challenging. The eight-year bond will have a yield of around -0.07 percent, and the 25-year bond will have a yield of about 0.67 percent, according to Reuters calculations.

However, bond markets in the eurozone are calmer now than on Monday. The yield on the German government’s ten-year bond, considered the main benchmark for these securities in the eurozone, was around -0.11 percent, and unchanged this morning. The yield on ten-year Italian government bonds was about one basis point lower and was close to 1.09 percent. The closely monitored risk premium against German bonds thus remained at around 122 basis points.

Debates on common debt are growing in the European Union, which has long been rejected by the Netherlands, Austria, and the Scandinavian countries in particular. Some EU commissioners do not hide the fact that a recovery fund of €750 billion (over 19 trillion korunas), which is intended to support economies after the coronavirus crisis, can be the first step towards a permanent common debt union.

Title image: A man walks past the Euro sculpture in Frankfurt, Germany, Thursday, March 11, 2021. The European Central Bank will have a meeting of the governing council on Thursday. (AP Photo/Michael Probst)

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