FRANCE AUCTION RESULTS: LT OATs

RXJ5 130p, bought for 26.5 up to 27 in 6k.

The potential EUR800bln increase in EU defence spending touted by European Commission President Von Der Leyen is probably more sizeable than expected, given our policy team's report pointing to ~EUR100bln joint funding instrument (Von Der Leyen pointed to ~EUR150bln for the size of that instrument) and rumoured EUR400bln in German defence spending that could be funded via a special fund.

• To quantify that figure, EU defence spending sat at €326bln during ’24.
• The size, speed and horizon of any spending increase will be key for markets, with EGB long ends already sensitive to increased issuance risk (as evidenced by Monday’s price action).
• Reaction to Von Der Leyen’s comments from across the EU now eyed.
• Initial market reaction sees Bonds tick lower, Euro Stoxx futures off lows and EUR/USD to fresh session highs.
• Note that EUR/USD remains below the Jan 27 high and reversal trigger (1.0533), with highs of 1.0524 seen thus far.
• German curve steeper, but a more muted reaction in German ASWs.
• EU-bonds also showing little sign of underperformance via spreads, seemingly given the wide gap between the joint funding instrument and touted potential total expenditure, which would put more pressure on individual states to provide defence funding increases.

European Commission President Ursula von der Leyen has outlined the Commission's 'ReArm Europe' plan intended to significantly boost defence and security spending at the EU and member state level. 

• One proposal is to activate the 'national escape clause' of the Stability and Growth Pact that will allow member states to increase domestic defence spending without entering the excessive deficit procedure.
• Proposes a new instrument that can put forwards EUR150B in loans to member states for defence investment. VdL: 'It will help member states to pool demand and buy together'. Claims that it can be used to the benefit of Ukraine.
• Third proposal seeks to allow member states to decide if they want to use cohesion policy funding to go towards defence spending (this would usually be used for infrastructure spending, or social or business investment).
• VdL also claims that ReArm Europe will seek to increase private sector investment in defence and security.
• Claims that the programme "could mobilise close to EUR800B for a safe and resilient Europe."

The activation of the escape clause and repurposing of cohesion funding was reported on 2 March by MNI's Policy team (see 'MNI: European Commission Eyes EUR100Bln Defence Tool-Source', 2 March, for access contact sales@marketnews.com). EU leaders will meet for a special European Council summit in Brussels on 6 March, with defence, security, and support for Ukraine.