Wednesday, June 19, 2024

EU Sells 15-Year Bond as Questions Linger Over Index Inclusion – BNN Bloomberg

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(Bloomberg) — The European Union is launching a new bond amid uncertainty over whether the bloc’s debt will be included in major sovereign indexes and a surge in far-right parties that is rattling investor confidence in the French economy.

The 15-year syndicated debt offering is the first since MSCI Inc. concluded a consultation on whether to reclassify the supranational to sovereign indexes, a move that investors expect to broaden the bonds’ appeal if other benchmark providers follow suit. A decision was expected last month but has been delayed.

The sale also comes one day after French President Emmanuel Macron shocked investors by calling a snap election to challenge Marine Le Pen’s path to power. French debt led European bonds lower Monday.

The sale provides a “good test” for the market, said Gareth Hill, fund manager at Royal London Asset Management Ltd. “Up until now, the narrative on EU bonds is they should/could keep richening on the index inclusion story, but the election news over the weekend may well put the buffers on this, for a while at least.”

The EU has grown into one of the largest issuers in the region since it started ramping up sales in 2020, but officials have expressed frustration that its cost of funding isn’t as low as some euro-area member states. One reason for that they cite is the bloc’s classification as a supranational issuer rather than a sovereign.

Supranational benchmarks are tracked by a smaller cohort of investors than government indexes. An EU survey of investors last year found index inclusion was “the single-most important remaining step in order for EU-Bonds to trade and price similarly to European government bonds.” 

“Even though political uncertainty in France has some negative spill-over effects on EU bonds as well, we still find EU bonds offer potential versus French ones ahead of the elections,” said Jan von Gerich, chief analyst at Nordea. Additionally, potential news on MSCI index reclassification “could trigger some performance of EU bonds,” he said.

–With assistance from Sujata Rao.

©2024 Bloomberg L.P.

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