What Are EU Bonds and Can They Become a Safe-Haven Powerhouse?

Key Takeaways

• Bonds issued and backed by the EU have rapidly matured into a major asset class.
• Existing EU bonds are not “true” Eurobonds, as they lack the common liability typical of sovereign federal bonds.
• Market demand is strong and growing, but political constraints remain.

When the European Commission entered the bond markets in October 2020, its inaugural €17 billion social bond program SURE drew more than €230 billion euros in orders and was 13 times oversubscribed. Five years later, the EU’s common-debt market has matured into an asset class with around €660 billion euros outstanding and a path toward roughly €1.1 trillion once current programs are fully deployed. Investor appetite remains robust, underlining the broader trend of global investors seeking to diversify from US-dollar based assets.

Are EU Bonds True Eurobonds?

While these instruments are not the full-fledged, jointly-guaranteed Eurobonds that politicians have debated since the European sovereign debt crisis from 2010-2012, the debt issued by the European Commission has behaved like a common European safe asset, drawing in central banks, pension funds and sovereign wealth funds eager for high-grade euro-denominated assets.

Today, the EU issues bonds mainly under SURE, the program designed during the pandemic to support jobs on the continent, and NextGenerationEU, a postpandemic recovery program. The backbone of NextGenerationEU is the Recovery and Resilience Facility, RRF, which at about €650 billion finances member states’ green, digital and structural reforms and accounts for the bulk of current EU bond issuance. Smaller programs include the Macro-Financial Assistance or MFA and the legacy EFSM program from the eurozone debt crisis.

Looking ahead, planned joint defense initiatives such as the proposed SAFE initiative could, for the first time, lead to large-scale and potentially recurring EU bond issuance for military and security spending.

These bonds are backed by the EU budget, which is funded by legally binding contributions from all member states and the EU’s own resources. However, they do not carry unlimited joint-and-several liability like a true federal bond would. They are temporary, capped programs—not a permanent fiscal union.

In our view, debt mutualization in the sense that one EU member state would be solely and permanently liable for the debts of another member state is unlikely in the foreseeable future.

Eichmann adds that the current scheme of bonds issued by the European Commission on behalf of the EU could also be pursued more intensively in the future.

The idea of a true common Eurobond remains controversial, with a group of countries including Germany, the Netherlands and Nordic nations fearing that shared liability would encourage fiscal irresponsibility, says Claudio Wewel, FX strategist at J. Safra Sarasin.

Former International Monetary Fund chief economist Olivier Blanchard and senior Citadel executive Angel Ubide have offered new proposals this summer. Instead of issuing new debt, they propose to replace a substantial portion of the already existing national bonds with Eurobonds, allowing for a speedy creation of a pool of European liquid high quality assets as a solution to the moral hazard issue, Wewel adds.

Supranational, not Sovereign Bonds

Index providers are treating these vehicles as “supranational” bonds, comparable to those issued by the European Investment Bank or Germany’s KfW, rather than as national sovereign debt. DBRS Morningstar assigns the European Union a AAA rating with a stable outlook, citing its strong institutional framework, increase in the budgetary headroom, and the obligation of member states to finance expenditures.

Although currently excluded from mainstream government bond indexes, “the EU is striving to have its bonds included in government bond indexes in the future,” DWS’s Eichmann says. This would further align the treatment of EU bonds with that of large national issuers in terms of benchmark status and portfolio construction.

Why a Strong EU Bond Market Matters

For European policymakers, the point is not only cheaper borrowing, but also greater strategic autonomy. Trade tensions and US tariffs have created unusual cross-asset correlations, potentially strengthening the euro’s global role and underscoring Europe’s need to act.

“Eliminating barriers within the EU is essential to enhancing the depth and liquidity of euro funding markets, which is a precondition for a wider use of the euro,” European Central Bank President Christine Lagarde said in June. “The planned issuance of bonds at the EU level—as Europe races to shore up its own defense—could make an important contribution to achieving these objectives.”

According to J. Safra Sarasin’s Wewel, greater strategic and financial autonomy ”requires a largely independent European financial market with a deep and liquid euro government bond market that can compete with the US Treasury market.”

He says Europe cannot rely on German government bonds, or Bunds, alone, whose €2.5 trillion market is less than 10% the size of the US Treasury market, making it unrealistic that a deep, globally competitive safe-asset market can be built through Bund issuance.

EU Bonds Could Swell to €1 Trillion

“Of the €650 billion in the Recovery and Resilience Facility, just under 60% has been utilized so far in the form of grants or loans,” says Oliver Eichmann of DWS.

“We expect the European Union to issue €150 to €170 billion in the coming year. With additional programs—such as joint defense initiatives like SAFE—the market for EU bonds could grow toward €1 trillion in the coming years, representing a significant market segment.”

Compared with the current volume of marketable US Treasury securities, the EU market will remain only a fraction of this size.

“But the market is becoming more liquid and the EU is working on issuing more regularly and predictably. This would create a credible European benchmark,” says DWS’ Eichmann.

How Can Retail Investors Invest in EU Bonds?

Retail investors can buy EU bonds like any other bonds directly through banks or brokers, just as they would with any other fixed-income securities. As the market has grown, secondary-market liquidity has improved sharply, with tighter bid-ask spreads and larger trading volumes.

Many supranational or euro government bond funds now include meaningful allocations to these securities, and several green bond ETFs hold NextGenerationEU issuance, which includes a large green tranche. This makes EU bonds accessible for investors who prefer mutual funds or ETFs.

The secondary market has deepened even further thanks to recent innovations: Germany-based derivatives exchange Eurex launched Euro-EU Bond Futures in September, marking a milestone for market maturity. These derivatives allow investors to hedge interest rate risk, implement more advanced strategies, and protect bond portfolios during volatility. They also deepen overall liquidity in the underlying bonds.