European Rescue Fund Creates a New Big Beast in Bond Market

Congratulations to the European Union for agreeing a groundbreaking deal to distribute 750 billion euros ($864 billion) of grants and loans among its 27 members to bolster the recovery from the pandemic. Now it has to find a way to pay for it. And bond investors are ready, willing, able and eager to help.

Step forward an oven-ready vehicle already used by the European Commission, which already borrows in the name of the EU to satisfy centralized funding needs in the bloc. The Commission can tap the highly liquid bond market to pay for the rescue fund, with the financing spread out over the next seven years in line with the EU budget framework. The actual debt maturities will be much longer and will be spread out across the yield curve, allowing for a lot of flexibility to adjust bond sales to wherever investor demand is strongest.