News that the European Union would only fund €40bn in long-term bonds in the second half of 2023, half what it raised in the first six months, proved a boon for the supranational's spreads, which tightened versus European government bonds. However, bankers have questioned how long that reduced spread will last for a supranational that still has significant long-term net funding needs, as well as fundamental differences from sovereign issuers.
The spread between the supranational's February 2033s and the 10-year Bund was down by around 4bp from last Monday' close, moving from 65.5bp to 61.5bp according to Refinitiv. The spread over France, meanwhile, tightened by 5bp from 12bp to 7bp over the same time period.
While bankers generally said the lower H2 target has not hurt its campaign to become sovereign-like, many were sceptical about how long the tightening effect would last.
"This might be just a dip in volume," said one banker. "From what I'm seeing here in terms of trading activity, everybody after the initial euphoria around that [H2 plan]... started to realise, okay this is not going to be a longer-lasting, substantial change... The first reaction was very much trading-driven, then it somehow stopped. Now it's time to re-evaluate and see where this is really going: whether we are going to see, not such an abrupt tightening, but a longer-lasting [shift] that is driven by real money and not just traders being afraid that they are giving their bonds away too cheap."
That scepticism stems from a newly proposed Ukraine Facility that the European Commission announced on June 20, which is expected to provide coherent, predictable and flexible support for the country from 2024 to 2027, including loans at an indicative level of €33bn. Furthermore, while the EU's H2 funding is half what it did in H1, its overall funding target for the year is flat to 2022's sum.
Aside from questions about the permanence of the EU's tightening, it is also unclear if the sheer scale of the supranational's funding programme and this H2 drop will re-price swathes of the SSA market generally.
"It will be interesting to see how the relative value interplay develops in the coming weeks – with them now suddenly richening versus France and other SSA names – and to what extent that is sustainable," said a second banker.
The quest for sovereign status
The effects of the H2 target on the supranational's spread to EGBs come against a backdrop of a steady stream of technical changes and mechanisms that the EU has been introducing to bring its bonds closer to how sovereigns trade.
The European Commission, which manages the EU's debt, said that to increase liquidity of its bonds, it is building a facility to support their use as an instrument in repurchase agreements, a development it expects to implement by early 2024.
Among the EU's other efforts was the single label introduced for EU bonds, doing away with the separate labelling that had designated products as being used for a specific programme, like NextGenerationEU. And the European Central Bank announced that it will start treating EU bonds the same as sovereign paper when they are used for collateral.
But sovereigns have two things that the EU currently does not that are keeping the supranational from bringing its paper in line with EGBs, the first banker said: autonomy over tax collection and an unquestioningly permanent presence in the capital markets.
The plan
The Commission said the EU's funding target for the remainder of the year reflects the expected disbursement needs of various beneficiaries, notably EU member states under the Recovery and Resilience Facility.
"EU member states are finalising the reshaping of their Recovery and Resilience plans to reflect the new grant allocations, request additional loans or adjust to new priorities, including REPowerEU. Disbursements under the Recovery and Resilience Facility are hence expected to rebound in 2024," it said.
Issuance will continue to include NGEU green bonds to finance the green component of the RRF.
The EU's H2 funding plan will see the borrower bring four syndications and five bond auctions, with maturities ranging between three and 30 years. It has also said that it is preparing a framework to provide price quotes for EU securities on electronic platforms to come into effect before the end of 2023 as it seeks further liquidity for its bonds in the secondary market.
Already, the issuer is gearing up for its next funding windows. It sent an RFP to banks for "further funding needs under its EU issuance programme, to be executed in the near future".
Its next syndication window is the week starting July 10. There are three more scheduled EU syndication windows after that: one the week starting September 11, one starting on October 9 and the last one coming the week of November 13.