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Analysis: Debt ceiling crises sharpen scrutiny of U.S. safe-haven status

  • Debt ceiling raises issues about US safe-haven status
  • US greenback share in cbank reserves at lowest in 25 yrs – IMF
  • Euro issuance in ESG markets helps euro status – bankers

LONDON, Oct 13 (Reuters) – U.S. debt ceiling wrangles and the euro’s rising dominance of bond issuance linked to environmental or sustainability objectives may begin to chip away at Treasuries’ status as the last word reserve asset, placing Europe ready to spice up its share.

The $22 trillion market in U.S. authorities bonds is the bedrock of the worldwide monetary system with unrivalled depth and liquidity. Viewed as a super-safe asset that can by no means be defaulted on, it underpins the greenback because the world’s primary reserve foreign money.

Except {that a} default, be it solely a short-lived technical one, now not seems to be like an impossibility and that would harm the safe-haven picture of Treasuries, analysts and traders say.

As the Treasury bumps up repeatedly towards borrowing limits, the rising polarisation of Congress has lately turned what needs to be a easy vote to lift the debt cap right into a collection of extended crises.

While an October default has lately been averted, impasse will doubtless resume with a longer-term resolution required by early December. learn extra .

Which is to not say the greenback is about to be knocked off its pedestal. Reserve status shifts play out over many years and, apart from the benefit of buying and selling Treasuries, most world commerce continues to be invoiced within the buck.

Yet a course of could also be in prepare for Treasuries to cede some share to rivals, significantly the euro, with traders and companies alike warning of the monetary harm that stems from treating the debt ceiling as a partisan weapon.

“Each time this kind of thing happens, it incrementally dents international confidence in Treasuries. You can’t say the U.S. doesn’t lose feathers each time it politicises the debt ceiling issue,” mentioned Thomas Costerg, senior economist at Pictet Wealth Management.

IMF Q2 international alternate reserves

Even a partial erosion of reserve status would impose vital prices on U.S. taxpayers, based on a current paper by the Brookings Institution.

The paper estimated that the unparalleled security of Treasuries lowers authorities borrowing prices by a mean 25 foundation factors relative to different main sovereign issuers. At present debt ranges, this interprets into curiosity financial savings of roughly $60 billion this yr, and greater than $700 billion over the following decade.


International Monetary Fund information reveals the share of greenback reserves held by central banks fell to a 25-year low of 59% by the top of 2020 and is holding close to these ranges.

Overall final yr, traders bought Treasuries whereas shopping for Japanese and German authorities bonds, Institute of International Finance (IIF) analysis reveals.

Foreign flows into Treasuries vs peers, 2009 and 2020
Foreign flows into Treasuries vs friends, 2009 and 2020

One rationalization is that rising market central banks have been pressured to promote Treasuries through the pandemic disaster however IIF chief economist Robin Brooks additionally notes the bonds didn’t act because the safe-haven they need to be through the market meltdown in March 2020 – when an enormous selloff pushed yields sharply increased earlier than Federal Reserve intervention stabilised markets. learn extra

“What matters – if you are a safe haven asset that Treasuries purport to be – is that you get inflows when times are tough and risk appetite is low,” Brooks mentioned. “That didn’t happen last year, but it did very noticeably for German Bunds.”


The euro makes up a fifth of world foreign money reserves however has been hindered by the dearth of a sizeable “safe” asset. AAA-rated German bonds quantity to simply 1.6 trillion euros ($1.9 trillion), a tiny quantity in comparison with the $20 trillion plus Treasury market. learn extra

Fractious U.S. politics, nonetheless, distinction with European cohesion through the COVID disaster and the creation of an 800 billion-euro joint fund has quashed euro zone break-up threat and can enhance the pool of AAA-rated euro-denominated belongings.

The cost of insuring against a debt default, US vs Italy
The value of insuring towards a debt default, US vs Italy

Christian Kopf, CIO for mounted revenue and FX at Union Investments, mentioned he had been stunned by the demand for euro-denominated belongings from Asian shoppers, particularly in South Korea. He famous that the availability of such belongings tops 4 trillion euros when together with all bonds with a nonetheless strong AA- ranking and above.

A much bigger future promoting level could also be euro dominance of bonds assembly environmental, social and governance (ESG) standards, which finance tasks benefiting the local weather or society.

Almost half of new world inexperienced bond issuance was in euros final yr, versus 28% in {dollars}, based on Marcus Pratsch, head of sustainable bonds and finance at DZ Bank.

Such securities are in excessive demand, with this week’s 12 billion-euro European Union inexperienced bond flooded with 135 billion euros in orders. The U.S. Treasury is but to problem inexperienced debt.

Central banks are eager for extra ESG publicity, a 2019 survey by Morgan Stanley and the IIF discovered. Japan final week mentioned it will begin utilizing its reserves to purchase ESG securities learn extra .

“The euro will…remain the most-sought currency in the sustainable bond market, further strengthening its international role,” Pratsch predicted.

Reuters Graphics
Reuters Graphics
Reporting by Dhara Ranasinghe; further reporting by Sujata Rao and Tom Arnold; Editing by Sujata Rao and Kirsten Donovan

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009.  REUTERS/Rick Wilking

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Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016.   REUTERS/Jason Lee/Illustration

U.S. dollar and euro banknotes are seen through broken glass in this illustration taken, June 25, 2021. REUTERS/Dado Ruvic/Illustration

Foreign flows into Treasuries vs peers, 2009 and 2020

The cost of insuring against a debt default, US vs Italy

Reuters Graphics

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