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EU: a good start but it will get tougher

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There were likely some well earned fist bumps and high fives going on in Brussels this week after the EU inaugurated its Next Generation funding programme with a triumphant €20bn outing. But things won’t always be so smooth for the issuer.

Such a big print — and the €140bn order book that accompanied it — was impressive by any standards. But to do so with a deal that landed within spitting distance of the issuer’s curve and that swiftly tightened to meet it was even more so, and will no doubt earn it the gratitude of the next SSA borrowers to come to the primary market.

But the EU can’t take this kind of success for granted. Its job is only going to get harder.

Investors are excited about the new issuer. Its programme has been so well flagged that surely every eligible investor has opened a line by now with the EU’s name on it.

That is just as well, as the borrower is planning another two syndications by the end of July. It needs to print €150bn a year to fulfill the €800bn programme on schedule.

But those lines will gradually fill up over time, and more immediately, investors will drift off on holiday and liquidity will thin out over the summer.

The awesome power of the ECB’s purchasing programmes is all but committed to absorbing every cent of net new supply this year, but what about next year? If all goes to plan, the ECB will be buying far less by this time in 2022, but the EU will have to maintain a punishing pace of borrowing.

The rest of the SSA market is getting an early taste of what it will be like to navigate around a calendar studded with huge EU outings. Without a central bank backstop, it will only get harder.

Congratulations to the Brussels funding team on a good start — that’s €20bn down and only €780bn to go.

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