Eurobonds in government indices? Possible savings of up to 25 billion
Low liquidity has always held back EU bonds, increased yields compared to similar bonds and weighed on the Commission's budget. The news of the start of procedures for entry into the Ice Euro Government Index has already reduced the spread on Bunds, but for Intesa the key issue remains the 'transience' with which the market is perceived.
3' min read
3' min read
Eurobonds within the main bond indices for government bonds? The proposal could be a key element in improving the liquidity and efficiency of a market - that of bonds issued by the European Union to finance the Next Generation Eu programme - which is still struggling to get going and is already causing movement on the stock markets. A study by Intesa Sanpaolo, in which the issues at stake are analysed, comes to the conclusion that inclusion in the benchmark would be positive, but probably not decisive in order to make this fundamentally important instrument more competitive.
The reform being studied
.The cue is provided by the public consultation that Ice Bofa, one of the leading managers of financial indices globally, has launched on the possibility of considering the EU Commission as a 'sovereign issuer' and therefore reclassifying its bonds within its indices. The survey will close at the end of June and a final decision will be announced next August, with possible entry into force from the end of October of changes that do not seem to be underestimated.
From a technical point of view, Intesa Sanpaolo recalls, the 53 EU issues with a current nominal amount of€520 billion are in fact included in the Ice-BofA Euro Quasi-Government index that brings together the eurozone's supranational issuers, where they are worthapproximately 19% of the total. Transferring them to the Ice Euro Governmentwould reduce their share to 5.4% of the benchmark, but would give them the opportunity to be part of a much more substantial index (with a nominal value more than triple, of almost 8,500 billion against 2,700 billion of the previous one) and present in the portfolios of institutional investors.
The market reaction
.The announcement of the possible inclusion in government indices certainly did not go unnoticed, as from the beginning of April to date the spread between the 10-year yields of Eurobonds and German Bunds has narrowed by 5 basis points and in general a better performance compared to other European issuers has been noted. "The projects being implemented to increase liquidity, including the inclusion in government benchmark indices, may in our view support further outperformance of EU bonds," confirmsChiara Manenti, strategist on fixed income at Intesa Sanpaolo, pointing out, however, that the favourable effect is likely to be short-lived.
"In the long term, as witnessed by the premium demanded by investors, the main problem remains that of a market that is perceived as transitory", Manenti admits, drawing attention to the fact that "the average duration of outstanding bonds with these characteristics will rapidly reduce already from 2030 onwards and all bonds will mature by 2058". Here, however, the market theme risks becoming intertwined with political plots, because the analyst also emphasises how "in this perspective it would be essential if the proposal of the Economy Commissioner Paolo Gentiloni on the financing of the European Union's growth model were followed up".
