WisdomTree: EU bonds to spearhead a greener and more unified Europe

8 maart 2021

By Lidia Treiber, Director, Research, WisdomTree

2020 was a challenging year for European bond investors but an attempt, by the European Central Bank (ECB), to stimulate an economic recovery in Europe has provided cause for optimism.

It was no surprise that unconventional and protracted lockdown measures would ultimately lead to a contraction in eurozone gross domestic product (GDP) during Q1 and an even larger drop in the second quarter, even outpacing the levels witnessed in the great financial crisis.

The ECB had previously indicated that European Union member states would need to unify in times of crisis to support an economic recovery in the eurozone - this idea gave new life to European Union (EU) bonds. Adopted by the European Commission (EC) in May 2020, the SURE[1] initiative will be funded by up to €100 billion of new joint European Union debt issuance. This programme focuses on helping EU member states revive their labour markets amid the pandemic. To encourage demand from investors, bonds issued under SURE fall under the EU’s social bond framework, highlighting that the European bond market is shifting towards becoming more aware of Enivronmental, Social, and Governance (ESG) factors.

Shortly after the SURE initiative, the European Commission (EC) put forward the NextGenerationEU programme with a significantly larger envelope of €750bn aimed at funding the eurozone’s economic recovery.  As these programmes will help increase the issuance of social or green bonds in the market, the EU is sending a clear message that it will do ‘whatever it takes’ to stimulate the economy while demonstrating its commitment to sustainable finance as it aims to build a greener and more social Europe. The EU long-term budget 2021-2027, together with NextGenerationEU, forms the largest stimulus package ever financed through the EU budget totalling €1.8 trillion.

Historically, the EU was not a dominant borrower in the bond market but the expected EU bond issuance of €850bn[2] will transform the European bond market and Supranational space. Through the SURE programme and the NextGenerationEU initiative, the EU is set to become the second largest AAA-rated issuer in Europe and the largest Supranational bond issuer in Europe. With such a high credit rating, EU bonds have shown to be significantly more correlated to German bonds than to European Corporates[3]. They are also offering higher yield relative to German government bonds for similar maturities.  European Union bonds could draw some parallels to US Treasuries which are not linked to one US state but provide funding for the US economy.

We have already seen an unprecedented demand for bonds issued under the SURE programme. The first round of fund raising attracted the highest ever demand for a bond sale[4], at over €233bn. The latest issue of bonds was, again, oversubscribed and a trend we expect to see throughout SURE issuances owing to the EU being a high-quality issuer and an ESG element attached to the debt. We expect the NextGenerationEU initiative to capture a lot of interest once bonds start being issued.

These grand measures taken by the ECB and EU amid the pandemic are monumental steps towards a greener and more unified Europe, while laying the path to rebuild the European economy.

Sources: European Commission website, European Central Bank website and Bloomberg.