In a twist, the European Union (EU) sold bonds in January to pay for the Irish bailout. This is one of the first times the EU has issued debt on behalf of a member state, but it is a trend that is likely to continue, at least in the short-term.
"It’s a unique situation where you now have a conglomerate of countries that are using their collective credit to issue bonds to help a member state," says Andy Nybo, principal and head of TABB’s derivatives practice.
The bonds, issued on Jan. 6, were received even better than expected. While €5 billion ($6.5 billion) were issued, demand was over four times the offer at €20.9 billion ($27.4 billion). The yield on the five-year bonds was around 2.59%.
"By issuing that debt on behalf of the member country, the EU made a significant statement, saying, ‘We stand ready, willing and able to support our member countries. We’ll prove it by issuing this debt on behalf of Ireland.’ Psychologically, that was a huge boost for every European nation," Nybo says.
The EU transferred the borrowed money to Ireland and is charging a 5.51% interest rate, better than the 7.8% Irish bonds had been demanding.
The following week, Portugal held a successful bond auction that saw yields below 7%, the point where investors became nervous in Greece and Ireland. Based on the success of the initial issuance, some are already wondering if EU-issued debt could become the norm instead of an exception.
"It depends, was this a onetime incident where they stepped up to the table and said ‘We are going to back our member states’ or, based on the success of this, would it make sense for them to lower the cost of borrowing across Europe by issuing these bonds on behalf of all member states?" Nybo says.
If the latter were the case, bonds issued by the EU could compete with U.S. Treasury bonds in times when investors are seeking a safe haven.
In 2009 Eurex launched futures on Italian 10-year bonds (Euro BTP futures). The product gained popularity as a way to manage the widening yield spread between German bonds and those of peripheral European nations. Eurex would not comment on whether a new bond contract is in the works.