Analysis - The next 'safe' asset? EU joint bond markets spring to life

AMSTERDAM (Reuters) - The European Union’s first debt sales for coronavirus support schemes have galvanised the once-sleepy trade in EU common bonds, the soaring daily volumes a promising sign for what could become an internationally sought-after reserve asset.

FILE PHOTO: European Union flags flutter in front of the European Commission headquarters in Brussels, Belgium, October 2, 2019. REUTERS/Yves Herman

The EU market, with just 54 billion euros outstanding at the start of this year, is expected to grow exponentially in coming years to fund a 800 billion-euro EU recovery programme, as well as the 100 billion-euro SURE unemployment support scheme.

Already almost 40 billion euros in SURE debt has been raised since October 21, when the debut sale drew record $275 billion in bids. Average daily trading volumes across October and November were 20 times more than the average for the 12 months prior, according to trading platform MarketAxess.

The average daily turnover ratio on EU debt - the amount that changes hands relative to the total outstanding -- has gone from being practically nonexistent to 0.8%, Reuters calculations based on MarketAxess’s data show.

That ratio is comparable to that of Italian and French bonds, according to data from the Association for Financial Markets in Europe.

For graphic of EU bond trading volumes surge:

Liquidity matters to investors, making it easier and often cheaper to transact. It’s also a prime consideration for safe assets such as U.S. Treasuries and German Bunds, which investors seek out during uncertainty.

“If you need to hold safe assets, it might be just as safe to hold EU bonds as it is to hold France,” said Sheraz Hussain, portfolio manager at Bluebay Asset Management. “For me, it is a growing and it will be a growing part of the portfolio.”

Deals of up to 50 million euros each can now be conducted easily. Previously just half that amount could be traded at a single clip, Hussain said.

What helped liquidity is the sheer volume of issuance -- within six weeks, it’s almost doubled the EU’s debt. Individual bonds are large, too, up to 10 billion euros in size.

On another liquidity metric -- bid-ask spreads, or the gap between buyer and seller prices -- 10-year SURE bonds have a 5-10 bps range, comparable to the French benchmark, Refinitiv prices show.

“The sheer number of quotes you see on the bonds, it’s definitely way more like government bonds ... the sizes that are quoted feel way more government-like,” said Christian Mundt, syndicate manager at DZ Bank.


The joint EU instrument was hailed as a game-changer, not least because it helps address the euro’s biggest drawback for reserve managers: the lack of a deep enough pool of AAA-rated assets, comparable with Treasuries.

The large issuance sizes and subsequent surge in liquidity have attracted good participation from central banks and official institutions early on, says Katrin Wehle, managing director on Deutsche Bank’s sovereign, supranational and agency team.

Such investors typically hold back from participating in the initial stages to gauge liquidity. But they bought 37% of October’s 10-year bond, almost twice that of prior European issuance, according to Deutsche strategist George Saravelos.

For graphic of EU bonds distribution:

However, the EU market still has far to go -- at just over 90 billion euros, it is one-twentieth of Germany’s market.

A liquidity boost could come once the EU starts using bond auctions, possibly next year. That would codify its relationship with banks, which would participate in auctions, then assume responsibility for secondary markets [L8N2H62PU].

As the sector grows, it could need futures to enable investors to hedge or buy options on future transactions.

“I’ve actually already heard the first question from investors, whether we think there’s going to be a euro future, comparable to the Bund future,” DZ Bank’s Mundt said.

Reporting by Yoruk Bahceli; editing by Sujata Rao, Larry King