The European Union’s ambition for its bonds to be regarded as sovereign debt were dealt another blow this week, even if that blow was not a particularly fresh one.
US-based ICE Data Indices rejected for the second time the idea of labelling EU bonds as sovereign rather than supranational, having already done so almost exactly a year ago, which means it will not be including them in its sovereign bond indices.
The EU’s curve sold off after the news, after notably outperforming swaps and many euro SSAs peers in recent months. Many are already expecting other index providers, whether they have open consultations underway or not, to make a similar decision to ICE when the time comes.
A second rejection from the same provider should not be viewed as another set-back in the EU’s transition to a sovereign-style issuer, however. It does not signal a lack of progress — quite the opposite. Having a second consultation exemplifies the progress made.
In less than two years, secondary liquidity of EU bonds has improved; Eurex EU bond futures will begin trading next month; and the worries about whether the EU can maintain its status as a jumbo borrower for decades to come will have been soothed somewhat by €650bn of potential new joint borrowing as part of the bloc's 2028-2034 EU budget, as well as a chunk of extra defence spending to fund.
Each time the EU asks for index inclusion, it has more arguments in its favour as to why it should be viewed as a sovereign issuer, even if it is not actually a pure sovereign itself.
There will always be some investors that insist sovereign bond indices should remain purely that. But bit by bit the EU is giving the rest of the market pause for thought.