A European Safe Asset? Not Without the Investors
A new study finds that European Union bonds, despite their top AAA rating and joint backing by member states, are not treated as true safe assets by financial markets. These bonds pay higher interest than similar German bonds, not due to credit risk but because their supranational legal status keeps them out of major bond indices. This limits their investor base and makes them more volatile, especially during crises, challenging the idea that more EU debt alone creates safety.
What it examines
This paper studies why European Union (EU) bonds, despite being safe and jointly guaranteed, pay higher interest rates than similar government bonds. Using data analysis and asset pricing models, the authors show that EU bonds' legal status and exclusion from major bond indices shrink their investor base and raise their borrowing costs.
What it concludes
The study finds that EU bonds cannot become true safe assets without legal reforms granting them sovereign status and broader index inclusion. Simply increasing issuance or regulatory tweaks won't close the spread. These findings impact EU financial policy and suggest the euro will struggle to rival the dollar as a global reserve currency.
Evidence objects
Despite AAA ratings and joint EU guarantees, EU bonds pay higher interest than German bonds, not due to credit risk, but because their 'supranational' status excludes them from major fixed-income indices.
key_findings bullet 1 · key_findings · validation V0
EU bonds have only 20% of the index-tracking investor base compared to similar sovereigns, making them more vulnerable to price drops during crises, as revealed by unique data and a new demand-based pricing model.
key_findings bullet 2 · key_findings · validation V0
The study finds that expectations of ECB support can dramatically affect EU bond spreads, challenging the notion that issuing more EU debt alone creates a safe asset, and calls for legal and market reforms.
key_findings bullet 3 · key_findings · validation V0
This paper uniquely examines EU-issued bonds as European safe assets, introducing a novel demand-based asset pricing framework and new empirical data on index inclusion and investor base. Its innovative focus on index exclusion and liquidity needs, combined with fresh measures and modeling, offers compelling insights for both practitioners and policymakers.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … First, we focus on fixed-income markets, where the … 50% of AUM in the European fixed income asset class (about €… fixed-income index we obtain data about bond inclusion …
Source row: 23 · abstract type: snippet