The European Union (EU) drummed up 107 billion euros ($130 billion) of orders for its debut bond sale under the recovery fund, the first sign that investor appetite is robust for the AAA-rated securities.
Danske Bank A/S and ABN Amro Bank NV expect the EU to raise 10 billion euros or more from the sale of 10-year debt, with about 80 billion euros of issuance slated for this year. Order books have so far fallen short of the 145 billion-euro record for a similar-dated social bond last year, but can still climb.
“It is just flying,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S. “They have done the safe choice of doing a 10-year bond and giving a decent new issue premium. It can’t go wrong.”
The sale has been one of the most highly-anticipated in recent times, given the huge amount of debt that the EU plans to sell over the next few years. Before the pandemic, pooling European debt would have been a near-impossible feat and faced stiff resistance from the region’s richer countries.
The NextGenerationEU program has itself been a boon for borrowing costs across the region, narrowing the premium faced by riskier debt issuers like Greece and Italy.
Two more sales are set to come by the end of July, and green bonds may come as early as autumn. The EU also plans to issue bonds via syndication, as well as sell short-dated bills as part of its plans to become a fully-fledged debt issuer.
Europe is emerging from the pandemic as the speed of vaccine distribution ramps up. That’s seen bets mount for a rapid economic recovery this year, but also inflation, which is a scourge for bond investors. The European Central Bank is expected to announce a winding down of its pandemic purchase program in September, having held off from making the decision last week.
“International investors are very happy with these bonds coming out of Europe,” Klaus Regling, managing director at the European Stability Mechanism told Bloomberg TV. “People are happy with how Europe has reacted to the crisis and how the euro area is developing.”
The banks highlighted the relative cheapness of the bond when the EU opened orderbooks, which is often used as a way for issuers to entice investors into buying up a new security. The sale was given price guidance of two basis points below midswaps, a tightening from the initial price thoughts.
“Investor appetite for the deal will be significant,” wrote ABN strategist Floortje Merten in a note to clients. “We deem it likely that the European Commission will issue a significant size.”