Reuters
The European Union is preparing to approach index providers for its debt to be included in their government bond indexes, an EU official told Reuters, a move that would attract steady demand from a much bigger pool of global investors.
Index inclusion “is something we are discussing with market participants at the moment, while we are also doing our internal analysis,” the official said, looking at how the EU fulfills index providers’ criteria.
EU bonds are included in broad bond indexes but inclusion in dedicated government bond indexes compiled by the likes of Bloomberg, JPMorgan or FTSE Russell would be a game changer, as trillions of dollars of investor funds tracking the indexes would effectively become forced buyers.
Bloomberg and JPMorgan did not immediately respond to requests for comment. FTSE Russell declined to comment.
EU funding officials have said investors do not treat it like a government even though it is raising hundreds of billions of euros of joint debt with the backing of member states.
“It’s our objective to be included in (European government bond) indices. Because this will support how EU bonds are trading in the market, it would finally support the political objective of a common joint financing on a European level,” the official said.
The EU is a supranational institution, not a national government. Public documents outlining criteria for inclusion in government bond indexes do not cite exceptions to include other entities but focus on the size, currencies and credit ratings of government bonds.
The EU has set out to raise up to 800 billion euros in common debt by 2026 to finance a post-COVID recovery fund in addition to an earlier pandemic scheme, becoming one of the world’s biggest bond issuers in less than three years.
Having focused so far on setting up its funding infrastructure, the EU is now boosting its efforts to be treated as a government borrower.
It is triple-A rated but has shorter-term borrowing costs that are higher than those of lower-rated Spain and Portugal.
That’s because the EU is still not fully treated like a government the way Germany or France is and its bonds have less liquidity compared to governments, traders said, undermining aspirations for the debt to become a euro zone safe asset.
“If funds have to hold (EU bonds) because they are a part of their benchmark and they are tracking those benchmarks… it’s basic economics that there’s going to be more buyers and sellers,” said Royal London Asset Management fund manager Gareth Hill, adding this would reduce EU borrowing costs.
The EU has also started selling the bonds backing its various schemes under a single label and is preparing a framework for banks to provide investors with regular pricing quotes. A repurchase agreement facility launched by 2024 will make it easier for investors to take positions.
Big investors are also calling for index providers to treat the EU as a government.
“We have pushed for that in the index inclusion council from Bloomberg, one of the largest index providers… although we think it will be difficult,” said Kaspar Hense, senior portfolio manager at BlueBay Asset Management.
Hense said a sticking point from an index provider perspective was that the EU does not have access to direct tax receipts.
The EU official noted the bloc has elements of a sovereign, such as a budget and at least indirect taxing powers through member states’ contributions.
Cosimo Marasciulo, head of fixed income absolute return at Europe’s largest asset manager Amundi, said it was also calling for EU inclusion in government bond indexes.
“You have bonds which have shared risk between different countries, even if it’s issued by an entity which does not have a tax power, but I don’t think it’s relevant. It’s part of the integration that we have at the European level,” Marasciulo said.
