MNI: NextGenEU Auctions Seen Aiding Liquidity, Yields

The European Commission is looking at how to improve communication of its funding plans and at further developing auctions of its debt as officials fret over a growing spread between its funding costs and those of lower-rated eurozone borrowers, EU sources told MNI.

“As we are still a young issuer, there is still a lot of need for information and explanation,” one source said, adding that developing future issuance via auction as opposed to syndication would help support secondary market liquidity in EU bonds.

European Commission bonds should be regarded as fully-fledged sovereign financial instruments rather than those of just a supranational agency, sources said.

But investors have demanded an increasing premium for EU bonds, as highlighted by German Finance Minister Christian Lindner in arguments against calls from some countries for a new SURE-style EU loan programme to help states cope with the energy crisis. EU borrowing costs are now slightly above those of France and Belgium, Lindner noted. (See MNI: Stiff Resistance To Italy's Push For EU Funds-Officials)

A 10 year-bond issued to fund the NextGenerationEU programme was yielding 3.08% on Tuesday, up from 0.97% shortly after its sale on March 23. The yield on equivalent maturity French bonds rose to 2.87% from 0.92% in the same period, while Belgium’s 10-year yield rose to 2.92% from 0.96%.

The EU’s AAA credit rating is higher than that of either France or Belgium.

SSA VS EGB

Since the launch of joint EU borrowing to fund NextGenEU in 2021 the Commission has pursued a diversified funding strategy, selling bonds of different benchmark maturities. The Commission aims to raise around EUR800 billion under NextGenEU by 2026.

The relatively steep rise in EU borrowing costs is being laid at the door of the markets convention that issuers like the Commission be classified as a Supranational Sub-Sovereign Agency rather than a European Government Bond issuer, despite the fact that the political agreement on NextGenEU in 2020 was hailed as a watershed in progress towards developing a joint financing capacity for the bloc.

The NextGenEU 10-year yield compares to 3.09% for the European Investment Bank, a related SSA issuer, and 3.15% for the European Stability Mechanism. Debt maturing in 2033 issued by Germany’s trade export bank KfW yields 3.19%.

The EU’s large expected borrowing should eventually boost secondary-market liquidity and ease relative yields, EU sources said.