• Charles Heighton

EU Covid Bonds are the most subscribed issue ever

By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets

On Tuesday, the first wave of EU-backed Covid bonds was issued. Investors fell in love with the issue and bid 13 times the amount on offer. The bankers are claiming that this is the largest order book in bond market history. Such demand may imply a stellar yield, alas this is not the case. The ten year has a yield of -0.26%.

This is a strong yield compared to German Bunds and French bonds. However, it is worth noting what a strange world we now live in, where negative-yielding debt can attract record-breaking demand. In time this demand will be met, as hundreds of billions will be needed for the agreed EU recovery fund. This will be raised over several years.

Some market watchers were concerned that there would be little demand for this issuance and the ones in the future due to the huge amount being raised in the next few years. For example, the 200 billion euro’s worth of bonds expected to be issued in 2021 is four times the size of all current outstanding EU debt. This kind of ramp-up could theoretically cause issues for demand. Although, the first signs are obviously very positive.

This kind of oversubscription really underlines a desperate search for security in the current economic climate. Investors are still uncertain about the future especially as stricter rules have been recently re-imposed across the continent and elsewhere. The pandemic is far from over so there may be further economic damage on the near horizon; it is, therefore, logical for investors to seek this kind of asset. The EU’s triple-A rating makes these bonds one of the few in the world at the most secure level, making them even more attractive. I would not be surprised if all the other issuances in the future receive similar demand; the caveat to this may be if an EU recovery appears to kick in and markets rally. In this scenario, investors may shy away from safety and chase returns once again.



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