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Eurobonds, avalanche of requests for 3- and 15-year maturities. Repo news: an attempt to make them more liquid

Lack of liquidity has always been a theme that has plagued the issuance of common debt and Repos could improve the situation. Uncertainty remains for the future of Eurobonds: the EU will issue up to 2026 billion by 750. And after that?

Eurobonds, avalanche of requests for 3- and 15-year maturities. Repo news: an attempt to make them more liquid

The European Union placed a yesterday new bond to support Ukraine and finance the 11 billion PNRR which has seen requests for well 166 billion. But the real news was the launch of the repo mechanism, which will allow, at least in part, to resolve the liquidity problem which afflicts the common debt instrument, given that neither the ICE nor the MSCI wanted to include Eurobonds in their indexes.

3 and 15 year Eurobonds requested for 166 billion and placed for 11

La European Commission has placed Eurobond for 11 billion of euros in his ninth syndicated operation for 2024. For the two tranches of bonds at 3 and 15 years old requests reached the super figure of 166 billion. In detail, the operation involved an issue maturing in December 2027 for 5 billion at a gross rate of 2,506% and one maturing in October 2039 for a further 6 billion at 3,227%. The two tranches were requested for 81 and 85 billion respectively, that is, 16 and 14 times the amount assigned.

But the real news is the improvement in liquidity

This week, in the presence of Budget Commissioner Johannes Hahn and Bundesbank Governor Joachim Nagel, at the Frankfurt Stock Exchange it was held Bell Ceremony in the negotiating room for launch “repos” on Eurobonds, realizing a project in the drawer since December 2022.

This, which seems like a technical detail, actually has a very broad significance. In fact, a handicap of Eurobonds, the necessity of which has also been widely underlined by Mario Draghi in his report, has always been his low liquidity compared to other sovereign bonds, such as Bunds, OATs, BTPs or Bonos, even if enjoy a triple A rating. Furthermore, in the last few weeks theIntercontinental Exchange Inc. (Ice) has announced that it will not include Eurobonds in the his index. He had also done the same last June Morgan Stanley Capital International (Msci). Both financial providers consider European Union bonds “Supranational Emissionsi” and therefore not “safe assets”. Liquidity is a determining factor for trading, because it reduces the risk for sellers to find themselves without immediately available demand and for buyers to have to search for a seller for a long time. When trading liquidity is low, returns tend to be more volatile and bid-ask spreads are relatively high. European Central Bank itself has long been urging the community institutions to create a “safe asset” in the area, as a need felt by the market.

Il repo mechanism (Repo), goes in this direction because it provides liquidity to the "primary dealers" in the event that they have insufficient securities to offer to the counterparty that requests them. "This operation" notes Elena Moalli, strategist at Intesa Sanpaolo, "will improve the liquidity of the market". Furthermore, Bloomberg announced one consultation on the inclusion of EU bonds in their government bond indices.

Goal for 2026: issue 750 billion eurobonds

The EU will issue up to 2026 billion until 750 of euros in bonds to finance Next Generation EU, the plan to relaunch the continental economy designed in the midst of the pandemic and to support Ukraine. Italy is the main beneficiary with almost 200 billion between loans (120 billion) and grants (70 billion). With this latest operation the Commission has totaled emissions for about 44 billion, out of the 65 billion that represent its financing target for the second half of 2024.

Overall with the latest placement, the EU has issued 410 billion of euros in Eurobonds under the unified financing approach. In detail, of the proceeds raised, almost 260 billion have been disbursed to Member States under the PNRR. Another 64 billion have been allocated to other EU programmes that benefit from NextGenerationEu funding. Finally, over 10 billion have been disbursed so far this year to Ukraine under the plan that will finance up to 33 billion between 2024 and 2027. Total EU debt It currently amounts to approximately 577 billion, of which approximately 20 billion euros in the form of EU Bills, short-term securities similar to our BoTs.

What will happen in 2026 when the program ends?

Uncertainty about the future remains: after the 2026 Will Brussels continue to issue common debt? These doubts mean that the yields achieved are higher than those of triple-A rated issuers like Germany. In practice, borrowing costs the Commission more than the German government.

Upstream, there is a purely political issue: not all EU states agree on the need to issue more common debt. Moreover, the EU continues to lack its own revenue, so national governments remain the only ones indirectly exposed to supranational emissions.
Germany leads the opposition, guarding its supremacy in the bond markets. It fears having to share debt with countries that are less fiscally sound and ending up paying more to issue its own debt.

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