Europe has issued its first labelled defence bonds, marking a shift in how private capital is mobilised to support the continent’s defence sector.
The bonds, issued by French financial institutions and listed on Euronext, carry the European Defence Bond Label—a voluntary market designation designed to direct debt financing towards defence activities while giving investors transparency over how proceeds are used.
This explainer examines what defence bonds are, how the label works, why the market is emerging now, and what it means for investors and Europe’s defence industry.
What is a defence bond?
A defence bond is a conventional fixed-income instrument—typically senior unsecured debt—whose proceeds are earmarked for defence and security activities.
Like any standard bond, investors lend money to the issuer in return for regular interest payments and repayment of principal at maturity. Credit risk, maturity and yield are assessed the same way as other corporate or bank-issued bonds.
What distinguishes European defence bonds is not their legal structure, but their explicit labelling and use-of-proceeds framework specifying how funds can be deployed.
Under the Euronext label, issuers commit to allocating capital to companies within Europe’s defence industrial base. Eligible uses include expanding manufacturing capacity, supply-chain financing, working capital and loans to defence SMEs and mid-caps. The framework excludes internationally prohibited weapons—chemical, biological and cluster munitions—while allowing conventional military and dual-use activities.
Why the label matters
The label functions similarly to green or sustainability bond labels in other parts of the fixed-income market.
Labels do not change how bonds function financially, but provide investors with clarity on what activities are being financed, how proceeds are tracked, and how issuers report on use. This helped green bonds scale by giving asset managers confidence that capital was being deployed as advertised.
For defence, the challenge has historically been classification rather than demand. Many institutional investors have treated defence exposure cautiously, often excluding it by default due to ESG mandates or lack of transparency.
The defence bond label provides a structured way for investors to opt into defence exposure where permitted, while allowing other strategies to remain defence-free. For asset managers, this makes defence financing an explicit allocation decision rather than an unintended consequence of broader credit exposure.
Euronext positions the label as market-driven, not regulatory. There is no EU mandate to issue defence bonds, but labelled instruments benefit from clearer disclosure standards and greater visibility to investors actively seeking defence exposure.
Early transactions—including Bpifrance’s heavily oversubscribed issue—suggest demand is being pulled by investors rather than pushed by regulation, in contrast to parts of sustainable finance shaped primarily by EU rules.
Why now?
The timing reflects structural pressure on Europe’s defence industry.
Since the outbreak of a full-scale war between Russia and Ukraine in 2022, European governments have depleted ammunition and equipment stocks while committing to sustained military support for Kyiv. NATO members face pressure to raise defence spending and rebuild industrial capacity after decades of underinvestment.
Public funding tools exist but are limited in scale. The EU’s European Defence Industry Programme offers low single-digit billions in euros, while lending mechanisms like SAFE support procurement rather than fully financing industrial expansion.
Defence bonds offer a way to mobilise private capital alongside public programmes, shifting part of the financing burden from sovereign balance sheets—which have traditionally underwritten most defence investment—toward capital markets.
Market significance
Issuance has been small but telling. Bpifrance’s €1bn labelled defence bond was nearly four times oversubscribed, indicating strong investor appetite when defence exposure is clearly defined and ring-fenced.
By comparison, Europe’s green bond market runs into hundreds of billions of euros annually, underscoring how early-stage defence bonds remain. For now, they represent a niche segment rather than a fully established asset class.
Defence bonds also face hurdles green finance no longer does: political sensitivities, divergent national definitions of acceptable defence activity, and ongoing ESG debates around military spending. These factors may limit how quickly the market scales.
What happens next
If issuance broadens beyond French institutions into other EU countries, labelled defence bonds could become a durable financing channel for Europe’s defence industry—particularly for mid-sized suppliers that struggle to access traditional bank lending.
Outside Europe, defence financing has largely relied on sovereign guarantees, export credit agencies and direct government contracts rather than labelled capital markets instruments, making the European approach relatively novel.
For now, defence bonds represent an incremental but symbolically important shift: defence finance moving from the margins of capital markets toward a more formalised, transparent and investable segment of the fixed-income universe.