EU's first social debt set for surefire success in hungry market

London

A NEW player is set to make a big splash in the niche pool of sustainable debt this month, a market where investors can't get enough of new offerings at the moment.

The European Commission will sell its first social bonds as soon as this week, tied to a regional job support programme called SURE, to counter the devastating impact of the coronavirus. That comes as such sales have recently enabled borrowers to lower costs, even on top of a slide in rates driven by investor demand for havens.

While such environmental and social debt only makes up an estimated 2 per cent of the euro-area market, the pandemic has turned social bonds into the fastest-growing corner of sustainable finance. Europe could sell 10 billion euros (S$15.9 billion) a month, according to Commerzbank AG, to achieve 100 billion euros by next year - almost the size of total global issuance so far.

"The EU looks set to become the largest issuer of sustainable instruments on the planet," said Commerzbank strategists including Michael Leister in a note. The bloc also plans 225 billion euros of green debt, though that's unlikely before next year.

Yields on the safest euro-area debt have fallen towards March's lows following a resurgence of the pandemic, while rates have already hit all-time lows in peripheral nations from Ireland to Greece.

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The parameters of the European Central Bank's pandemic bond-buying programme should ensure the new social debt already has a "substantial" buyer, the Commerzbank analysts said. Other investors should be attracted to the additional premium on offer over similarly AAA-rated German bonds, they added.

Ratings decisions will also be in focus this week, given S&P Global Ratings will judge Italy, Greece and the UK. The main question is whether Italy will stay two notches above junk, since S&P is the outlier at one level higher for the euro area's second-most indebted nation than given by both Moody's Investors Service and Fitch Ratings.

Societe Generale SA sees 30 per cent odds of a downgrade this week and suggests investors take a cautious stance. It recommends buying Italy's 10-year debt and selling its German counterpart only when the spread rises to around 150 basis points, from around 130 now.

Euro area bond sales are set to slow this week, with Germany and Belgium selling 5.8 billion euros of debt. France will pay more than 41 billion euros in bond redemptions and coupons. Italy, Austria, Portugal and Belgium will also make small coupon payments.

The UK will hold two regular gilt auctions and one inflation-linked bond sale, selling up to 4.6 billion pounds, and the Bank of England will buy back 4.4 billion pounds of debt in three operations. BLOOMBERG