(Bloomberg) -- Eurex Clearing AG plans to launch bond futures for the European Union’s debt next year, joining its rival Intercontinental Exchange Inc. in the race to provide liquidity to what has become one of the region’s biggest issuers.
The exchange cited increased secondary market volumes and the EU’s new repo facility as meeting the “pre-requisites” for a deliverable futures market, according to an emailed statement. The decision follows an annoucement from ICE that it is launching a similar product next month.
It’s a change of tack for Eurex, which just weeks ago said it was too early to introduce a contract in 2024 as originally planned. Back then, it said a “key” pre-requisite for such a product is that the EU bond program becomes sustainable and of long-term nature beyond 2026.
The bloc only started ramping up debt issuance after the pandemic and currently has no plans to issue bonds that increase its debt load beyond 2026. But the Eurex decision is a welcome development for the EU regardless, which has touted a futures market as a way of boosting trading in its bonds.
“The market for EU bonds is continuously developing in terms of depth and liquidity,” the Eurex statement said. “Secondary market trading in EU-Bonds is on a par with some of the largest sovereign issuers.”
The EU is looking to improve the liquidity of its bonds with the aim of ultimately achieving lower borrowing costs. That’s included the introduction of a repo facility in October, enticing banks to provide better quotes on its bonds, and 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 either Eurex’s or ICE’s contracts will attract sufficient volumes.
The yield on 10-year EU debt was two basis point lower at 2.76% on Tuesday — some 50 basis points more than comparable German bonds.
(Updates with market pricing in final paragraph.)
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