Huge Demand for Euro-Denominated Safe Assets
Last week the Euro surged across the FX dashboard. It started to trend higher already from Monday’s opening and closed the week at the highs. The entire week was bid on every dip, a phenomenon seen on most Euro pairs (e.g., EURUSD, EURGBP, EURJPY).
The strong demand for the Euro came as no surprise. For the first time in history, the European Commission raised money from international financial markets in the form of 10y and 20y bonds. The joint European debt issuance is here, and the strong demand for the bonds supported the Euro in the FX market too.
Europe Launched the SURE Bonds
The SURE (Support to mitigate Unemployment Risk in an Emergency) bonds were received with utmost enthusiasm by financial markets. To have an idea about the impact and interest generated, it is worth looking at some numbers seen on the two offerings.
The first transactions in the SURE bonds came in two tranches – a €10 bln for 10y bonds and €7 bln for 20y bonds. In total, the European Commission planned to raise €17 bln in the first transactions. However, it received bids for the bonds in excess of €200 billion. Almost 600 bidders fought for the 10y bonds, and more than 500 for the 20y issue.
Behind the huge success of the relatively small bond issuance, it paves the road for the bulk of the issuance expected somewhere in the mid-2021 when the recovery fund issuance could start. The October SURE bonds issuance also sets a high bar in terms of the rates obtained by the European Commission. As the SURE bonds were oversubscribed by almost fourteen times, the rate was lower than, say, the French government bonds for a similar period.
Further analysis of the demand for the European bonds reveal that over sixty percent of the new bonds were placed with investors in the Eurozone. Only 10% went to non-EU investors, while the rest of demand came from other European countries.
It explains the demand for Euro for the entire because investors needed to liquidate other assets to get their hands on the Euros needed to buy the bonds. It also reflects a huge European private sector that lacks opportunities to invest when compared to other parts of the world. For example, the European equities went nowhere in the past decade or so, while the US stock market continuously made new all-time highs.
All in all, the bond issuances are more than a positive sign for Europe. It is also a threatening sign for the USD. What if the Europeans finally understand the advantages of having a reserve currency?