(Bloomberg) -- European Union bonds will continue to play an important role in markets for years, according to an Intercontinental Exchange Inc executive, rebuking concerns over the bloc’s long-term status as a major issuer.
Chris Rhodes, the president of ICE Futures Europe, said the firm is moving ahead with a launch of futures contracts tied to an index of EU debt next month. That’s even as rival Eurex Clearing AG delayed plans to start a similar product citing uncertainty over new issuance.
There’s still no political agreement on whether the EU will increase its debt load beyond 2026, despite a push from some officials to do so. The bloc ramped up its joint-debt issuance program in 2020 to help finance the region’s recovery from the pandemic, and has plans to refinance some of this stock through 2058.
“Part of the thesis here is more cooperation and more togetherness with regards to European politics,” said Rhodes in a Bloomberg TV interview. “There is uncertainty about issuance, but what we are pretty confident about is that EU bonds will continue to play a role beyond 2026.”
EU officials have been looking to improve the liquidity of the bloc’s bonds to lower borrowing costs, and the creation of a futures market has been touted as one way of boosting trading. They have also launched a repo facility recently, and have been lobbying index providers for inclusion in their larger sovereign-debt benchmarks.
Bond investors often use futures to hedge their portfolios and all major European sovereign debt issuers including Germany, France and Italy have such markets. Still, it’s not guaranteed that a newly launched EU futures contract will attract sufficient volumes.
“The market needs to scale, it needs tools to hedge, that tool doesn’t exist today,” Rhodes said. “As confidence grows, demand will grow and part of confidence growing is ‘can you hedge that risk?’ This is about closing that gap.”
ICE’s product will differ from traditional bond futures, which typically require investors to deliver an actual bond at the end of the contract, leading to a rush for the so-called cheapest-to-deliver bonds. Instead, the firm’s future will be tied to an index, similar to major equity future contracts.
“Particularly with an index methodology that can adapt for changing issuance, we think we can have a derivatives market that helps investors hedge,” he said.
--With assistance from Anna Edwards and Guy Johnson.
(Updates with details from interview starting on paragraph six.)
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