The NextGenerationEU bonds they are the new European safe-haven to be included in your basket. This is the thinking of long-term investors according to which the NextGenerationEU (NGEU) fund will have a fundamental role in harmonizing the financing costs of the whole Euro area, but the compression of spreads will be irregular.
NextGenerationUe bonds: demand boom
As Althea Spinozzi, Senior Fixed Income Strategy, says for BG Saxo, ‘Italy will be the biggest beneficiary of this new trend, while French government bonds could suffer as bonds up to five years provide a lower yield than new NGEU bonds. .
Research by Goldman Sachs points out that one of the risks behind NGEU bonds is the lack of protection from extreme scenarios such as a euro zone breakup. However, now that the EU is making important steps towards better European integration, this scenario seems unlikely. However, French government bonds at the front of the yield curve appear to be a market distortion caused by ECB policies. For the same reason, the yields on Greek government bonds are now lower than those of Italy.
The long-term investors they will want to buy more of these bonds, as it is an opportunity to buy a safe haven and at the same time make a sizeable gain over German Bunds. This explains why the 30-year tranche has seen the highest demand in recent bond sales: it offers around 40 bps on top of a 30-year Bund with a yield of 0.732%.
Furthermore, the decision to issue a third of NGEU bonds as green bonds is not accidental. ESG investments have a longer long-term horizon than traditional investments. In this way, politicians make sure that the fiscal stimulus will support the next generation (of European citizens), just as the name of the fund suggests.
Furthermore, the EU would save a lot of money by issuing green bonds. In fact, the “greenium” spread that the latter pay with respect to their benchmark is currently between -2 and -6bps. Over 240 billion euros of debt represent savings ranging from 48 to 144 million euros. Now the question, concludes the analyst at BG Saxo, is whether this “greenium” can be compressed further, as ESG investors are hungry for supply and more new investors are drawn to the new European green benchmark.