MNI INTERVIEW: EU Bond Market Needs More Issuance-ICMA's Hill

The European Union needs to issue more joint debt to avoid a decline in liquidity and higher spreads for bonds already issued by EU institutions, the International Capital Market Association’s co-head of market practice and regulatory policy Andy Hill told MNI.

"It's beginning to take on all the characteristics of a government bond market and ultimately could be something to rival the U.S. Treasury market. That could pan out if we continue to see de-dollarisation over the longer term, with less foreign purchases of USTs, which has been the trend in recent years," Hill said in an interview.

While the conclusion of large-scale borrowing under the EUR800 billion NextGenerationEU programme due at the end of next year could prevent EU bonds from becoming the safe asset which many have argued is necessary for the further development of the bloc’s capital markets, the EUR150 billion SAFE programme to fund defence spending is positive, he said.

EUREX FUTURES

"There is a risk if one thinks there is not going to be more issuance and that the market is not going to develop and issuance dries up then there won't be market interest and you could see spreads widen. But the SAFE bond announcement hopefully assuages some of these concerns, said Hill, who also welcomed the Sept 10 launch of Eurex's EU bond futures contract . (See MNI INTERVIEW: France Ready To Join SAFE Loan Facility)

"This is a positive eventuality, and something that has been talked about since the ramp up in EU issuance post-Covid ... This is the last piece of the sovereign bond market trinity: bonds, repo, and futures – with the three products creating a virtuous liquidity spiral,” he said. "They [the European Commission] have done a lot of work on repo". 

But Hill said that the contract will have to overcome a number of challenges, including the limited size of the underlying market, and limited deliverable baskets and repo market liquidity in deliverable bonds. Having said that, the basket size, including that of the CTD, is not dissimilar to those of say Spain or even Italy.

"These considerations could make the contracts a bit ‘squeezy; and therefore less reliable as a hedge. But ultimately, all of this can be solved by one single action: a lot more issuance in the underlying bonds. With the announcement about the increase in SAFE bonds, this is heading in the right direction,” Hill said.