EU begins NGEU bill auctions but secondary market needs support

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The European Union’s new bond issuance auction programme started on 15 September, via the TELSAT auction system operated by Banque de France for its EU Bills.

The European Commission – the EU’s executive arm – will issue, on behalf of the EU – up to around €800 billion between now and end-2026, to finance the EU’s recovery under the NextGenerationEU (NGEU) instrument. This translates into borrowing volumes of on average roughly €150 billion per year.

The Commission launched its strategic and liquid EU-Bills programme with a regular issuance pattern planned. The Commission will be issuing EU-Bills exclusively via auctions, typically taking place twice per month, on the first and third Wednesday of the month.

It will issue new 3-month and 6-month bills in the first auction of the month, to be followed by taps of these lines in the second auction of the month. The Commission reports that is envisages volumes of €2-3 billion for the auction of a new bill and €1.5-2 billion for taps.

Auctions for bonds will be taking place in principle every fourth Monday of the month. These will be used to issue new bonds or increase the volumes raised through bonds already issued, referred to as ‘taps’.
While the primary market for these bonds has proven successful, the secondary market is still immature notes John Edwards, managing director at electronic bond trading platform provider BrokerTec Europe.

“There is a lot of focus and interest around what is happening in the secondary markets, particularly in building liquidity,” he says. “That is why we and our peers are developing programmes to help nurture and concentrate liquidity.”

In part this is due to the unusual nature of the bonds, but also the relatively small total issuance to date – as this increases he sees secondary market activity increasing as well.

“This is the first true European EU bond issuance programme and fits somewhere between European Sovereign debt and Supranational structure, so it somewhat falls between different trading desks at the major dealers,” he says. “The issuance over the next few years is sizable but we really need to see the outstanding issuance grow before we would anticipate seeing more position taking. We see from both our D2D and D2C platforms that there is a lot of interest from the buy-side, but less at this time in the D2D volumes.”

The ability of firms to engage in repurchase agreements (repo) to manage short term liquidity will be key to supporting liquidity provision.

“As expected, we see a little more on the repo side from those who are involved either in the auction process or are conducting business with the buy-side, in order to manage long or short position financing in EU Bonds,” he notes. “We need a more liquid, better functioning repo market, to get everybody comfortable that they can actively take positions and manage the financing needs accordingly.”

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