The supranational Eurozone debt market, also known as Eurobonds, is about to reach an important milestone in its development. Intercontinental Exchange (ICE), the American market maker, is preparing to launch the first futures contracts on Eurobonds, which represents a new step forward for a type of fixed income intended to succeed the sovereign bonds of the countries of the zone euro. . Although this is a step forward to strengthen the common project of the European Union and the mutualization of its debt, experts believe that, for the moment, it will not have a significant impact on the walk. The idea is that futures contracts exist so that liquidity and investment in these securities increases, but this is a long-term move, in a market totally focused on German debt. For experts, It would be even more significant if Eurobonds eventually entered the major bond benchmark indices.
THE The history of Eurobonds dates back to the years of the European debt crisisearly 2011. The European Commission, with José Manuel Durão Barroso as commissioner, then proposed the first joint issuance of euro zone debt. To achieve a complete Monetary and Financial Union, the euro zone needs to have bonds on the market that represent the entire Union, debt securities with which risks are pooled. At least that’s what Barroso seemed to think at the time.
However, due to the refusal of some members of the Eurozone, the idea was abandoned, but a few years later, when Ursula Von Der Leyen was already President of the Commission, and with the arrival of the coronavirus pandemic, Covid -19, the joint bond project is dusted off and the joint debt issuance is approved for the first time. It was the official birth of the first Eurobonds, designed to support the most vulnerable members in such a difficult time for the Eurozone economy as the pandemic. In this way, the risks of the issuer in the euro zone were pooled, with a new financing system common to all members, which would be channeled by the European Commission.
The Next Generation loans, like the grants, were financed by the issuance of this debt, but The bottom line was that the foundations for the future of European debt markets were already laid: the issuance of supranational bonds, one more step if in the future the European Union wants to function as if it were a large country. Far from being a first effort that would ultimately fall on deaf ears, the European Commission has shown over time that its project to create a large common debt market is moving forward, and plans to ICE’s plans to launch the first futures contracts on these securities are well underway. .this address. As pointed out Bloombergwe expect that these new financial products are launched and start trading on December 9.
In fact, Europe has once again launched Eurobond issues to support Ukraine in its war against Russia, and although it was initially doubtful that Mario Draghi would include the recommendation of ‘Issuing common eurozone debt in his famous Draghi report, the former president of the European Central Bank ultimately included this recommendation as one of the most important steps the union must take for the future.
The importance of increasing liquidity
The objective of creating a futures market on Eurobonds is to continue to increase the liquidity of these investment assets, and thus establish a solid market in which the securities become a benchmark in the bond market. European debt. Before the launch of these products or before Eurobonds are included in the main bond indices, the European Commission’s strategy is to create an interest rate curve; that is to say, having sufficient references of debt issued so that this important indicator for investors can be constituted.
The largest Spanish investor in one of the most important Eurobond benchmarks, who prefers to remain anonymous, explains the importance of the curve: “The issuer itself wants to build the curve, because this allows us, in as investors, to have it as a reference when we want to explore certain points in greater depth”, he explains. In this sense, the investor believes that it is “reasonable that in 2025 there will be more emissions only this year”, and that 2024 has not been a smooth year at all in this sense: To date, the European Commission has issued bonds for a total volume of almost 96 billion euros, and that’s without counting bills or the issuance of green or social bonds. In all cases, the issuance was fully covered by demand, showing that there is a market appetite for this type of bond.
Enrique Lluva, director of fixed income at Imantia Capital, confirms the importance for the market of creating a curve that can serve as a reference. “They don’t stop issuing, and they do it more and more frequently, so that all the points on the curve are formed. They want them to have more and more trading volume and for it to be a liquid market That is to say, it has more than 20 or 25 billion. The manager has several challenges: that the curve has deadlines, but that each point on it has a reasonable volume. It has to be 20 billion euros; The Spanish bond now reaches 20 or 25 billion euros, and 100 million are being exploited without major difficulties. This is the level they must reach,” Lluva emphasizes.
A necessary approach, but slow, and always ineffective
The construction of a supranational European debt market was neither quick nor easy. Although issuance has accelerated significantly in recent months, it has been difficult in the past to convince some members of the benefits of creating a Eurobond market. After all, Germany, for example, is sacrificing itself in a certain sense by issuing these securities, because it would finance itself more cheaply if it entered the market alone, instead of doing so with its EU partners. . Therefore, although Eurobond futures will finally be launched on December 9, analysts believe that it will still take a long time for this to become a decisive step in triggering the liquidity of these assets.
“European bonds move very slowly,” explains Lluva. “It will take time to reach market liquidity levels, but we will achieve all this, because when the next generation world ends,it is possible that European defense will be pooled, and this would represent 300 or 400 billion additional euros,” underlines the expert. To begin with, the Draghi report has already estimated 60 billion euros of additional investments in defense nothing only to achieve the commitment of 2% of GDP in defense spending available to NATO members.
Lluva, in fact, uses the current European bond futures market as an example to explain the liquidity problem. “Spain, for example, which has a liquid sovereign debt market, has no liquidity on futures contracts. Only Germany, France and Italy at the moment,” explains- he.
“If these futures contracts are launched, they will not have liquidity for at least the first 18 months”
For his part, the main Spanish investor in Eurobonds shares the expert’s opinion: “It is very difficult to have a significant consolidation of the market at the moment. The star of European fixed income futures is the German Bund,” and puts this reality into numbers: “Germany currently has 1.3 million futures open on the market; France has 440,000. These are significant figures. But Spain, with an issued debt of 1.43 billion euros, only has “There are 2,000 contracts open. And in Eurobonds, there are only 590 billion euros issued” , he emphasizes. “My opinion is that if these futures contracts are launched, they will not have liquidity at least in the first 18 months,” he says.
In fact, there is one element that, for Lluva, is more important for the Eurobond market to gain liquidity than the creation of futures contracts: the incorporation of these securities into the main global fixed income indices . When joining the ranks of these indices, large passive investors will be forced to purchase bonds in order to track the index, which will generate a significant source of demand and liquidity in Eurobonds. “The big index providers were going to do it this year, but they ended up not doing it. Once the big companies, like BlackRock, Axa, Allianz… have to track the indices and these bonds are included, they will gain a lot more liquidity,” he confirms.
Eurex slows down the launch of its futures: doubts about the Eurobond program
As the ICE prepares to launch its Eurobonds, Eurex, one of the main futures settlement houses, paralyzed the same project this week. The American market maker (ICE) seems to have more confidence in the future of Eurobonds than the European one (Eurex), since the argument presented by the latter for delaying the launch of its futures, initially planned for this year, is that they need more time to “analyze the situation”, whereas, in the past, they already explained to Bloomberg that The condition for launching these products was that the Eurobond program was sustainable and long-term in nature, beyond 2026.
The Eurex platform is the most used for investing in European sovereign bond futures. The launch of the first Eurobond futures contracts would therefore be essential for the European Commission to achieve the desired liquidity for its bonds.
