Bond Markets Risk Tectonic Shift With Trillion-Euro EU Debt Seen

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As European leaders marshal fiscal forces to steer the economy out of crisis, the bond market is bracing for what could be a major structural shift.

The European Union’s push for a jointly-funded program to finance pandemic reconstruction efforts could see the bloc becoming one of the region’s top debt issuers, in a market until now dominated by individual governments.

Combined liabilities of the EU and its agencies such as the European Stability Mechanism and the European Investment Bank could approach one trillion euros ($1.12 trillion) by end-2021, Citigroup Inc. strategist Michael Spies estimates.

EU leaders began negotiations Friday on a 750 billion-euro plan to help their economies rebound from the Covid-19 lockdown, with Germany and France pushing for a deal to be wrapped up next month. The European Commission, the bloc’s executive arm, has proposed issuing joint debt to finance the program, a radical step that would signal an unprecedented move toward integration among the 27 member nations.

“Supply has been dominated by sovereigns but this is about to change, with the EU becoming a major issuer in euro fixed income in the coming years,” Citi’s Spies in a client note.

Joint EU debt sales would add to an issuance flood seen this year as nations step up borrowing for stimulus plans — European primary-market offeringssmashed the 1 trillion euros barrier this month, 12 weeks sooner than in 2019. European Central Bank President Christine Lagarde and German Chancellor Angela Merkel have warned that a failure by the region’s nations to agree on a stimulus package could have dire economic consequences.

Week Ahead

The euro area’s longer-maturity bond sales in the coming week — by Germany, Belgium and the Netherlands — are set to total around 16.5 billion euros, according to Commerzbank AG. France is set to pay almost 26 billion euros in debt redemptions and Belgium 3 billion euros in coupons.

The U.K. will hold four regular gilt auctions and one inflation-linked bond sale next week, and buy back securities at a new rate of 1.151 billion pounds per operation that will include the reinvestment of a maturing bond. It will be held over two days rather than the previous pattern of three days.