The European Union’s €750bn coronavirus recovery fund will be used to issue bonds with a wide variety in duration in order to create a “European yield curve”, according to the head of the European Commission’s Directorate-General for Budget.
“In addition to issuing bonds with a maturity of up to 30 years, there will also be an emphasis on the short end, in order to construct a European yield curve,” said the director-general of the EC’s budget department Gert Jan Koopman during a webinar on the EU’s sustainable recovery plans, organised by Dutch pension asset manager APG.
“European investors have told me they are keen for a European bond curve to materialise,” said Koopman, adding he has also been “encouraged” by an enthusiastic international response to the plan.
“Many investors from, for example, the US and Japan have told me this [European yield curve] would be a gamechanger for them. It will lead them to reassess their allocation to Europe, not just in bonds but also in equities,” he added.
The Commission’s emphasis on the importance of a wide range of available maturities to create a fully-fledged “European yield curve” suggests this could be a step towards establishing a permanent EU bond market.
This would be welcomed by institutional investors including pension funds, said Erik Beckers of First Pensions, a pension fund consultancy in the Netherlands. “I think a sufficiently liquid market for EU-issued bonds with an adequate variation in maturities would be an interesting matching instrument for Dutch pensions funds, not least because returns will probably be somewhat higher than those on offer on Dutch and German government bonds.”
Pascal Christory, chief investment officer at AXA Group, who also participated in the webinar, welcomed the development of an EU bond market with a wide variety of maturities. “We use the complete curve in our business,” he said.
Koopman, however, maintained that the European Recovery Fund is a “one-off programme designed to face an extraordinary situation”. But it’s also a long-running initiative with many potential benefits, he added.
“It will impact the international role of the euro if it means we can attract more long-term international investors and we also believe this issuance will strengthen the Capital Markets Union.”
Both EU recovery funds – in addition to the €750bn recovery fund there is also the temporary support mechanism to mitigate unemployment risks because of the coronavirus crisis SURE – will also give a boost to the market for sustainable bonds, said Koopman.
“SURE will place €100bn in social bonds which will triple the value of social bonds available in Europe.”
On top of this, 30% of the Recovery Fund’s issuance, or €225bn, will qualify as green bonds, he added. This would represent an 89% increase in the size of the global green bond market compared with total issuance in 2019.