An EU official told Reuters that the EU is ready to contact index providers to include its debt in their government bond indexes, which would generate steady demand from a larger global investor pool.
The official said index inclusion “is something we are discussing with market participants at the moment, while we are also doing our internal analysis,” examining how the EU meets index providers’ standards.
EU bonds are included in broad bond indexes. Still, inclusion in specialized government bond indexes created by Bloomberg, JPMorgan, or FTSE Russell would alter the game, forcing trillions of investor money to buy.
Bloomberg and JPMorgan did not reply to inquiries. FTSE Russell denied comment.
EU financing authorities said investors do not see it as a government even though it is raising hundreds of billions of euros of joint debt with member states.
We want to be in European government bond indexes. “This will support EU bond trading in the market and finally support the political objective of a common joint financing on a European level,” the official added.
The EU is a supranational organization. Therefore, government bond indexes focus on size, currencies, and credit ratings, not outliers.
The EU plans to issue 800 billion euros in common debt by 2026 to support a post-COVID recovery fund and a pandemic program, becoming one of the world’s largest bond issuers in three years.
After establishing its financial infrastructure, the EU is pushing to be considered a government borrower.
It has triple-A ratings but higher short-term borrowing rates than Spain and Portugal.
Traders said the EU’s debt wouldn’t become a eurozone-safe asset since it’s not considered a country like Germany or France, and its bonds have less liquidity.
“If funds have to hold (EU bonds) because they are a part of their benchmark and they are tracking those benchmarks… it’s basic economics that there’s going to be more buyers and sellers,” said Royal London Asset Management fund manager Gareth Hill. This would lower EU borrowing rates.
The EU also issues bonds supporting its programs under a unified label and establishes a framework for banks to supply investors with stock pricing quotes. In addition, by 2024, a repurchase agreement facility will make investing easier.
Big investors want index providers to approach the EU like a government.
“We have pushed for that in the index inclusion council from Bloomberg, one of the largest index providers… although we think it will be difficult,” said BlueBay Asset Management senior portfolio manager Kaspar Hense.
Hense stated the EU’s lack of direct tax collections was an index provider issue.
The EU official emphasized the bloc’s budget and indirect taxation capabilities through member states’ payments.
Europe’s largest asset manager Amundi’s head of fixed income absolute return, Cosimo Marasciulo, has called for EU inclusion in government bond indexes.
You have bonds with shared risk between nations, even if they’re issued by an organization without tax power, but I don’t believe it’s significant. “We have European integration,” Marasciulo stated.
Comment Template