Strong demand for eurozone bonds

First bond issue was more than eight times over-subscribed.

The eurozone bail-out fund’s first ever bond issue received more than €40 billion in bids this morning.

The demand for European Financial Stability Facility (EFSF) bonds was more than eight times over-subscribed, which means that it allocated its maximum €5bn of bonds at a lower rate of interest than expected. The bond issue is aimed at helping fund loans to rescue Ireland’s economy.

The bonds come with a triple-A rating from all three main credit-rating agencies, which make them very attractive to investors. They were priced at a yield of 2.8%, which is six basis points above the benchmark mid-swap rate (the European reference point for pricing debt). This is lower that the initial expectation of a range between eight and ten basis points above the mid-swap rate.

The European Financial Stability Mechanism (EFSM), comprised of contributions from member states, issued its own bonds to support Ireland’s bail-out on 5 January. These were priced to yield about 2.5%.
 
Investor interest in the EFSF bonds was seen as a key test for the eurozone’s emergency fund, which has come under scrutiny amid fears that it is neither large enough nor flexible enough to cope if the European debt crisis spreads.

The European Commission and eurozone member states are working on ways to strengthen the EFSF, with conclusions expected when EU leaders meet in Brussels on 24 and 25 March.

José Manuel Barroso, the Commission’s president, is due to meet Angela Merkel, Germany’s chancellor, today to discuss a “comprehensive package” of reforms to strengthen the eurozone.