Can EU Bonds Serve as Euro-Denominated Safe Assets?

Abstract

A safe asset is of high credit quality, retains its value in difficult times, and is traded in liquid markets. We show that bonds issued by the European Union (EU) are widely considered to be of high credit quality, and that their yield spread over German Bunds remained contained during the 2020 COVID-19 pandemic recession. Recent issuances and taps under the EU’s SURE and NGEU initiatives helped improve EU bonds’ market liquidity from previously low levels, while also reducing liquidity risk premia. Eurosystem purchases and holdings of EU bonds did not impair market liquidity. Currently, an obstacle to EU bonds achieving a genuine euro-denominated safe asset status, approaching that of Bunds, lies in the one-off, time-limited nature of the EU’s COVID-19-related policy responses.

Pricing the Bund Term Structure with Linear Regressions – Without an Observable Short Rate

“…The special premium of the benchmark bonds in a currency area is an international phenomenon, see Diamond and Van Tassel (2022). In the euro area, the Bund also has a premium over the bonds issued by the EU and EFSF, see Bletzinger, Greif, and Schwaab (2022) and Carriero, Ricci, and Vangelista (2022).…”

Contribución de la UE a la reglobalización: de la búsqueda de la autonomía a la estrategia de seguridad económica

“…NGEU bond issuances are expected to come to €807 billion, of which €387 billion is intended as loans. On the safe-asset qualities of EUissued bonds, see Bletzinger et al (2022).…”

Safe Asset Scarcity and Re-use in the European Repo Market

“…Safe assets serve multiple purposes in financial markets, for example, the collateralization of liquidity flows in financial markets and fulfilling prudential requirements. The increasing excess demand, accelerated by the 2008 crisis and large scale asset purchase programs to combat low inflation, is a subject of growing concern in the academic and policy debate (e.g., Bletzinger, Greif, and Schwaab 2022;Asgari and Arnold 2022). Valves to alleviate the imbalance include a valuation rise of safe asset producing economies, the issuance of new public or private safe assets, and a change in regulatory frameworks (e.g., Caballero, Farhi, and Gourinchas 2016;Caballero, Farhi, and Gourinchas 2017).…”