(Bloomberg) -- MSCI Inc. announced it won’t add debt sold by the European Union to its range of government bond indexes, in a blow to the bloc’s quest to attract a larger pool of investors. 

The index-compiler, which consulted on adding EU bonds to its government benchmarks last month, said it will re-evaluate the EU’s eligibility next year. The bloc is currently treated as a supranational issuer, which the EU cites as a key reason why its borrowing costs are higher than those of European governments with similar ratings.

“MSCI has observed a bifurcation of opinion within the investment community regarding the inclusion of EU bonds in the government bond suite of indexes,” the statement said. “MSCI remains committed to closely monitoring the market’s adoption of EU bonds within the government bonds space and intends to re-evaluate the eligibility criteria in the second quarter of 2025.” 

Reclassifying the EU to a sovereign is a thorny concept, with the bloc politically divided on many traditional hallmarks of sovereignty, including joint debt issuance itself. Yet several investors have publicly backed including EU securities in government indexes, and the bloc’s bonds have outperformed on the expectation.

The news “is pretty disappointing after so much speculation,” said Pooja Kumra, the head of European rates strategy at TD. “This certainly means steeper EU curves — the long-end should suffer the most.”

An EU survey of investors last year found index inclusion was “the single-most important remaining step in order for EU-Bonds to trade and price similarly to European government bonds.” 

MSCI was not the first index-provider to formally float reclassification. Intercontinental Exchange Inc. launched its own consultation back in April, with its decision due to be announced in August. Bloomberg LP, the parent company of Bloomberg News, also offers index products for various asset classes through Bloomberg Index Services Ltd.

--With assistance from James Hirai.

(Adds analyst comment in the fifth paragraph.)

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