Strong rally in EU stimulus fund bonds, investors are waiting for the Fed

(Reuters) – The first bond sold backing the EU’s COVID-19 stimulus fund rose sharply a day after it was issued on Wednesday, as eurozone government bond yields fell as investors waited the results of the US Federal Reserve policy meeting.

FILE PHOTO: European Union flags fly in front of the European Commission headquarters in Brussels, Belgium, May 5, 2021. REUTERS / Yves Herman / File Photo

The European Union raised 20 billion euros ($ 24.26 billion) in a 10-year bond sale on Tuesday as part of the largest single-tranche institutional debt sale that has seen a almost record demand of 142 billion euros.

This allows up to 800 billion euros of bond issues to be launched until the end of 2026 to finance the stimulus fund that will make the EU a leading issuer.

The bond rallied sharply in the secondary market, further evidence of strong demand, showing that the market easily absorbed the large issue.

The yield, 0.086% to price, fell nearly 6 basis points to 0.035% on Wednesday.

The rally was similar to that which followed the EU’s first debt issuance supporting the SURE unemployment program, a more modest support program.

“Even we’re a little surprised that he managed to perform well so quickly, considering the size,” said one banker involved in the bond sale.

Investors were keen to buy the first issue of what will become a much more liquid funding program than SURE, while a recent drop in EU debt has also helped attract investors, the banker said.

The ECB’s decision to maintain accelerated bond purchases for the third quarter also gave investors the confidence to buy large debt sales.

Across the market, bond yields fell as the focus shifted to concluding the US Federal Reserve meeting.

The 10-year yield of Germany, the benchmark for the eurozone, fell almost a basis point to -0.24%, along with most other 10-year yields.

Fed officials should at least signal the imminent start of talks on cutting its bond purchases, while attention will also shift to new interest rates and economic projections to show just how bad the points are. views of policymakers have changed since March.

In recent weeks, bond yields, which have fallen on both sides of the Atlantic – closely correlated – have ignored a spike in US inflation.

“US yields will likely be the main driver of the direction of European yields over the next three months and I think the Fed’s rhetoric about cutting back and where their inflation targets are will be interesting,” Nick said. Sanders, portfolio manager at AllianceBernstein.

On the primary market, Germany will raise 5 billion euros through the auction of a new 10-year bond.

($ 1 = 0.8244 euros)

Reporting by Yoruk Bahceli; edited by Barbara Lewis


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