Colin Finlayson, co-manager of the Aegon Strategic Bond Fund at Aegon AM comments on the launch of EU recovery bonds:
“A year after the plans were originally announced, the EU is close to launching its first bond in support of its Recovery Fund. The announcement of the EUR800bln Recovery Fund last summer was a key part in supporting the European economy and its financial markets, in the midst of the pandemic – it committed fund to specific projects to offset some of the damage wrought on the region, with a focus also on Green initiatives.
“The agreement across members states to a program that offered a form fiscal transfers was rightly seen as a bold step by the EU. With agreement now reached on how the first tranche should be disbursed – with Italy and Greece looking like the big winners – the focus is now on the debt issuance to fund it. With a AAA rating, the bonds come with the strongest credit quality and could rival German Bunds as a “safe haven” asset.
“As ever, price will be key in attracting interest in their first EUR 10bln issue via a 10yr bond, which is due imminently. Without an additional spread over German Bunds, the interest from a purely investment standpoint could be a challenge, especially if liquidity in the new bonds is untested. If priced with a discount though, demand would be strong, owing to the additional yield on offer. For those that need another AAA rated issuer to invest in and crave the credit quality, the attraction would be obvious.
“An area that could see future interest would come from the plan to issue green bonds later this year, with 30% of future issuance expected to come in this form. The growing interest and need for green bonds could see strong demand for these assets from a more diverse investor base, adding to the potential for better return potential than their ‘brown’ equivalents.”