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

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  • Debt ceiling raises considerations about US safe-haven standing
  • US greenback share in cbank reserves at lowest in 25 yrs – IMF
  • Euro issuance in ESG markets helps euro standing – 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 might begin to chip away at Treasuries’ standing 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. Considered 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.

Besides {that a} default, be it solely a short-lived technical one, now not appears like an impossibility and that might damage the safe-haven picture of Treasuries, analysts and traders say.

Because the Treasury bumps up repeatedly in opposition to borrowing limits, the rising polarisation of Congress has lately turned what must be a easy vote to lift the debt cap right into a sequence of extended crises.

Whereas an October default has just lately been averted, impasse will probably resume with a longer-term answer required by early December. .

Which isn’t to say the greenback is about to be knocked off its pedestal. Reserve standing shifts play out over many years and, apart from the benefit of buying and selling Treasuries, most international commerce remains to be invoiced within the buck.

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

“Every time this sort of factor occurs, it incrementally dents worldwide confidence in Treasuries. You possibly can’t say the U.S. does not lose feathers every time it politicises the debt ceiling situation,” mentioned Thomas Costerg, senior economist at Pictet Wealth Administration.

IMF Q2 overseas change reserves

Even a partial erosion of reserve standing would impose vital prices on U.S. taxpayers, in keeping with a current paper by the Brookings Establishment.

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 12 months, and greater than $700 billion over the subsequent decade.


Worldwide Financial Fund knowledge reveals the share of greenback reserves held by central banks fell to a 25-year low of 59% by the tip of 2020 and is holding close to these ranges.

General final 12 months, traders bought Treasuries whereas shopping for Japanese and German authorities bonds, Institute of Worldwide Finance (IIF) analysis reveals.

Overseas flows into Treasuries vs friends, 2009 and 2020

One rationalization is that rising market central banks had been compelled 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 a large selloff pushed yields sharply larger earlier than Federal Reserve intervention stabilised markets.

“What issues – if you’re a secure haven asset that Treasuries purport to be – is that you simply get inflows when occasions are powerful and danger urge for food is low,” Brooks mentioned. “That did not occur final 12 months, however it did very noticeably for German Bunds.”


The euro makes up a fifth of worldwide foreign money reserves however has been hindered by the shortage of a sizeable “secure” 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.

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

The price of insuring in opposition to a debt default, US vs Italy

Christian Kopf, CIO for mounted earnings and FX at Union Investments, mentioned he had been stunned by the demand for euro-denominated property from Asian purchasers, particularly in South Korea. He famous that the availability of such property tops 4 trillion euros when together with all bonds with a nonetheless stable 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 initiatives benefiting the local weather or society.

Nearly half of recent international inexperienced bond issuance was in euros final 12 months, versus 28% in {dollars}, in keeping with Marcus Pratsch, head of sustainable bonds and finance at DZ Financial institution.

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 situation 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 .

“The euro will…stay the most-sought foreign money within the sustainable bond market, additional strengthening its worldwide function,” Pratsch predicted.

Reuters Graphics

Reporting by Dhara Ranasinghe; extra reporting by Sujata Rao and Tom Arnold; Modifying by Sujata Rao and Kirsten Donovan


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