Written by Bernard Mutitu, Senior Product Manager, and Dr. Paolo Angeles, Senior Product Analytics Manager The European Commission is on course to issue €90B in bonds in the first 6 months of 2025 as part of meetings its €275B annual budgetary demands. This bond issuance is intended to assist the EU raise vital funds for key EU commitments. These EU activities include green and digital transitions, migration and cris response, continued support for Ukraine and preventing economic slowdown. In fact, the Commission may look to go beyond the initial €90B as this figure was derived prior to recent political developments in the Russia-Ukraine conflict, potential US tariffs to the EU and the need to meet contributary shortfalls in the wake of the US’s review of aid contributions. This is not a new strategy for EU funding, given that the EU has raised over €600B since 2020 through bond syndications. Bond syndications are typically more expensive than auctions, but they allow governments to raise large sums quickly while diversifying their investor base. The continued issuance of government bonds to raise funding for the EU over the past few years has bolstered the Repo markets in the region in the following ways.
The supply of government bonds that can be used as high-quality collateral in the repo market has continued to spur the growth of this funding option not just for banks but also for institutional investors. Bond syndications run by the biggest interdealer brokers find their way into a regulated SFTR regime that powers investor confidence.
Increased regulatory demands for banks in Basel III has created an opportunity for non-bank firms to actively participate in the European repo markets. Additionally, EMIR 3.0 is expected to increase trading within the EU as it fosters an EU CCP first approach for repo transactions. Regulation has served to positively diversify the participant makeup within the repo market.
As EU bonds continue to be perceived as bonds with low risk of default, they contribute to the growth of repo specials. High demand for certain bonds in the EU market has led them to have a lower repo rate than the GC repo rate which may subsequently create opportunity for arbitrage.
As a viable alternative short term funding source for many firms, repos continue to provide firms with flexible ways to react to factors in an ever increasingly fast paced global economy. Short term borrowing can allow firms to bolster their balance sheets even as their stock prices react to market conditions such a potential Tariffs, natural disasters, or AI technology uncertainties from the east.
European central banks continue to actively use repos as a tool for implementing monetary policies in local markets. The continued ample supply of government bonds not only encourages firms to continue actively trading in this liquidity pool, but also reassures regulators that firms are trading in instruments that are well monitored by NCAs through regulations such as SFTR. The stable and steady tapering off in repo prices is consistent with the decline in inflation and interest rates. Parameta continues to be a market leader in GC repos and Specials for a host of European markets. Providing a clear view of the markets on a daily basis.
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