European Market for Bonds on Track to Surpass €1 Trillion Amid Plans for New Notes

According to a report by Bloomberg, the European market for its safest securities is set to surpass 1 trillion for the first time in history.

The European Union plans to issue new notes, which will add to the existing 995 billion worth of euro bonds from some of the largest issuers in the region. The offering points towards these new notes being an ideal alternative to bonds issued by Germany.

One of the reasons behind the growing popularity of these bonds is the rapid expansion of EU debt. The rapid expansion of EU debt is challenging the dominance of US Treasuries. These assets might soon be added to top bond indexes, making them more appealing to global investors.

EU Announces New Notes as Debt Supply Increases

The European region has nearly doubled its debt supply over the past decade. A majority of this supply has been generated by actions taken by the EU to fund the recovery of economies following the pandemic.

Despite the growing popularity, European bonds have yet to reach the same level as US Treasuries. Nevertheless, the influx in supply and high liquidity has attracted demand from leading global investors.

Investors are thirsty for these bonds," said Brian Mangwiro, a portfolio manager at Barings.
Last month, a 3 billion EU bond received 81 billion in orders, the highest cover ratio ever recorded in Europe's publicly syndicated debt market https://t.co/uXCEizU8e5

- Piotr Skolimowski (@Skolimowski) March 10, 2024

Investor behavior has also changed, with investors now looking for safety and liquidity across Europe through country sovereign debt. The growth of EU debt has presented an ideal alternative for investors while giving them a smaller yield for the same risk profile.

The growing popularity of European bonds has led to speculation that they could be added to leading bond indexes, making them more attractive to investors while paving the way for more sales and investments.

The European market is becoming a haven for investors, now competing with some of the leading US Treasurie markets. The enormous US Treasuries market has grown significantly to a nearly $27 trillion valuation.

Some institutions behind the growth of the EU bonds market include the European Investment Bank, the European Stability Mechanism, and the European Financial Stability Facility. These institutions have increased the supply of these bonds.

The EU is now exploring more funding options in the future to support initiatives such as defense, which will further boost the appeal of European assets, whose appeal is rapidly growing. The growing appeal of these assets is relevant considering the previous challenges associated with sovereign bond-backed securities.

Having these safe assets grow in Europe in the last 15 years will address the previous criticism of the lack of these assets in the region.

EU Funding is Needed for Common Projects

The Spain Finance Minister, Carlos Cuerpo, said that the EU needs to consider joint borrowing to finance investment across defense and economic security. His sentiments echo similar ones by other EU countries championing additional EU funding for common projects.

Having joint borrowing to support the EU's defense would result in a joint EU debt of 800 billion euros. This strategy would help address the effects of the COVID-19 pandemic on the EU's defense sector.

The proposals agreed upon during a summit of EU leaders to be held in the coming week demonstrate the willingness of governments to support a change in the lending policy. This policy proposes that the European Investment Bank increase funding for defense projects.

A report by Reuters says that joint EU borrowing and financing would play a critical role in promoting economic and defense security in the future. Some areas that will benefit from this include value chains, raw materials, energy independence, etc.

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