There’s a new gorilla in the bond market.
The European Union issued debt in a big way for the first time this week to finance pandemic relief programs, generating huge demand from investors eager for an alternative to the United States Treasuries that dominate the government bond market.
The bloc has issued debt before, for example to help Greece recover from a financial crisis, but never on the scale seen Tuesday. The European Commission sold 17 billion euros ($20 billion) in 10-year and 20-year bonds, the first of a series of issues that will raise a total of €900 billion during the next five years.
Previously, national governments were responsible for almost all of their own financing. Countries like Germany and the Netherlands were against issuing common debt, but the pandemic changed their views.
“We have done it before, but we are entering a new level,” Johannes Hahn, the European commissioner in charge of budget and administration, told reporters at a news conference in Brussels Wednesday to announce the results of the sale.
Demand for the bonds, which had interest rates near zero, was 13 times the supply, a sign that investors have grown uneasy about having too much of their money in Treasuries, analysts said. Investors are worried about soaring government spending by the United States government, a widening trade deficit and falling interest rates, George Saravelos, a bond strategist at Deutsche Bank, said in a research report.
The sale is “a vote of confidence on the euro as a reserve asset, particularly at a time when the dollar’s dominant role is being questioned,” Mr. Saravelos said.
The money is earmarked for relief programs such as subsidized furloughs for workers in industries hard hit by the pandemic. But the funds will take a while to reach European citizens because of a political impasse in Brussels.
The European Parliament is demanding that money be withheld from Hungary and Poland because of their increasingly authoritarian governments and violations of European Union rules. European leaders like Angela Merkel, the German chancellor, are against withholding the money.
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