Issuing European safe assets: how to get the most out of Eurobonds?

This study examines the market for euro-denominated bonds issued by the European Commission on behalf of the European Union (commonly referred to as Eurobonds). We find that the yields on currently outstanding Eurobonds exceed their theoretically appropriate levels. The yield on the model-implied Eurobonds benefiting from joint guarantees is actually around 40 basis points lower than that on the Eurobonds currently in circulation. There is therefore an untapped margin for reaping aggregate savings in terms of reduced interest expenditures. Based on an examination of the main characteristics of Eurobond issuances and of their investor base, we suggest that the wedge is due to a combination of insufficient liquidity and an inconvenience premium, as well as to the uncertainty about future jointly guaranteed issuance. However, we also highlight that the model-based yield on the 10-year Eurobond is about 20 basis points above that of a Bund with the same maturity, so countries like Germany and the Netherlands might have no incentive to promote joint emissions in the future. A successful strategy for the development of the Eurobond market would require two key elements: firstly, a steady flow of Eurobond emissions, which could be granted by common investment programmes; and secondly, some form of redistribution for the aggregate gains.