By Yoruk Bahceli
– The European Union raised 5 billion euros on Wednesday from its first-ever auction of joint debt, another crucial step toward its evolution into a leading issuer.
The bloc raised 2.999 billion euros from a sale of three-month bills and 1.997 billion euros in six-month bills, the top amount it was targeting.
The three-month bill priced at an average yield of -0.726% while the six-month issue was at -0.733%, the European Commission said in a statement.
Demand relative to the amount on offer, the bid-to-cover ratio, was 3.39 times on the shorter bill and 5.76 times on the longer bill.
The bills priced well below market yields, what traders refer to as overbidding, trading at yields as high as -0.65% after issuance, according to Refinitiv.
Matt Cairns, head of credit strategy at Rabobank, said the bills came at a lower yield than the bank had expected after looking at similar bills from the European Stability Mechanism, which is the euro zone bailout fund, and Germany ahead of the auction.
“There’s a strong incentive for large primary dealers to bid aggressively to support the broader mandates on offer from the EU,” Cairns said, referring to syndicated EU bond sales, which pay lucrative fees to underwriting banks selected from the primary dealers.
Auctions, where banks acting as dealers for the borrower purchase bonds then sell them to investors, are almost exclusively used by governments.
They are a crucial part of market infrastructure as they reduce the cost of issuing public debt and ensure secondary market liquidity.
The EU used syndicated bond sales, hiring banks to sell the debt directly to end investors, to raise some 90 billion euros of debt for its SURE unemployment plan.
But it decided to also include auctions in its funding of infrastructure for its much-larger recovery fund, which will raise up to 800 billion euros of debt by the end of 2026.
As part of it, the bloc launched a primary dealer network consisting of 41 banks.
The auctions are also another step that cements the EU as a government-like borrower, as the European Stability Mechanism is the only other supranational organisation that auctions debt.
Two EU bill auctions will be held per month, taking place on the first and third Wednesdays.
Auctions will not only be used to issue bills but also to re-open existing or issue new longer-term bonds once a month.