Debt managers at the commission have held calls with banks and investors this week ahead of the sale of the first bond backing its €800bn NextGenerationEU recovery fund — the groundbreaking vehicle agreed last summer to fund the region’s pandemic response with debt backed jointly by member states. Bankers are expecting the deal to price next week, raising more than €10bn from a new 10-year bond. The sale is the latest milestone in the transformation of the EU itself into one of Europe’s biggest bond issuers, and a prelude to regular debt auctions starting in September as Brussels aims to raise €80bn for the recovery fund before the end of the year. It comes at a time when markets have been buffeted by rising inflation, and investors are speculating about when the European Central Bank will begin to wind down its €1.85tn emergency bond-buying programme.
Brussels’ borrowing costs have risen since October when the first bond to fund the EU’s Sure programme — a smaller €100bn scheme to support jobs during the pandemic — met with record-breaking demand. Since then, the yield on 10-year EU bonds has risen 0.3 percentage points to just above zero, echoing similar advances across eurozone debt markets. Markets got a taste last month of what that might look like, as speculation of a reduction in support hit bond prices, pushing yields to their highest level in a year. During that period, the most recent EU debt sale drew weaker demand from investors than earlier issues. The €80bn of NextGenerationEU debt the EU plans to issue in the second half of the year will make it the biggest net borrower in the euro area over that period. The commission aims to raise up to €800bn between now and the end of 2026 for the programme, with about €407bn available for grants to member states and €386bn for loans. Borrowing volumes will average €150bn a year. About 30 per cent of the bonds is ultimately expected to be earmarked as green bonds to bolster sustainable finance.