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

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LONDON, Oct 13 (Businesshala) – Fluctuations in the US debt limit and the euro’s growing dominance of bond issuance linked to environmental or sustainability goals could begin to undermine the Treasury’s status as the ultimate reserve asset, leaving Europe You may be in a position to promote your share. .

The $22 trillion market in US government bonds is the backbone of the global financial system with unmatched depth and liquidity. Seen as a super-secure asset that will never be missed, it underpins the dollar as the world’s number one reserve currency.

Analysts and investors say that barring a default, which should only be a short-term technical, no longer looks impossible and could damage the Treasury’s safe-haven image.

As the Treasury repeatedly bounces against borrowing limits, increasing polarization of Congress in recent years has led to a simple vote to raise the debt cap in a series of protracted crises.

While an October default has recently been deferred, the impasse will resume with the necessary long-term resolution by early December. .

That doesn’t mean the dollar is about to knock on its pedestal. The change in reserve status has been going on for decades and, apart from ease of trade treasury, most global trade is still invoiced in the greenback.

Yet a process for the Treasury to hand over some share to rivals, particularly the euro, may be in train, warning investors and businesses alike of financial damage that regard the debt ceiling as a partisan weapon. originates from.

“Every time things like this happen, it boosts international confidence in the Treasury,” said Thomas Costerg, senior economist at Pickett Wealth Management. You can’t say that America politicizes the debt ceiling issue every time. Is.”

IMF Q2 Forex Reserves

According to a recent paper by the Brookings Institution, even a partial erosion of reserve status would impose significant costs on American taxpayers.

The paper estimates that the unique security of Treasuries reduces government borrowing costs by an average of 25 basis points compared to other major sovereign issuers. At current debt levels, this translates into interest savings of about $60 billion this year and more than $700 billion over the next decade.

Rise of Oceans, Fall of Empires

Data from the International Monetary Fund shows that the share of dollar reserves with central banks has fallen to a 25-year low of 59% by the end of 2020 and is near those levels.

Research by the Institute of International Finance (IIF) shows that last year overall, investors sold Treasuries when buying Japanese and German government bonds.

Foreign Flows into Treasuries Vs Peers, 2009 and 2020

One explanation is that emerging market central banks were forced to sell treasuries during the pandemic crisis, but IIF chief economist Robin Brooks also noted that the bonds were seen as safe-haven during the market downturn in March 2020. did not work in the – when a massive sell-off led to a sharp rise in yields before the intervention of the Federal Reserve led to a stabilization of the markets.

“What matters — if you’re a safe haven asset that claims to be treasury — is that you get an influx when times are tough and risk appetite is low,” Brooks said. “It didn’t happen last year, but it was pretty remarkable for the German Bunds.”

Euro profit?

The euro makes up one-fifth of global currency reserves but has been hampered by the lack of a large “safe” asset. AAA-rated German bonds amount to only 1.6 trillion euros ($1.9 trillion), a small amount compared to the $20 trillion plus Treasury market.

However, partial US politics, contrary to European reconciliation during the COVID crisis and the creation of an 800 billion euro joint fund, have eliminated the risk of a euro zone collapse and will increase the pool of AAA-rated euro-denominated assets.

Cost of Insurance Against a Loan Default, US vs. Italy

Christian Kopp, CIO of fixed income and FX at Union Investments, said he was surprised by the demand for euro-denominated assets from Asian clients, especially in South Korea. He noted that the supply of such assets topped 4 trillion euros, when all bonds still included with solid AA-ratings and above.

A big future selling point of bonds that meet environmental, social and governance (ESG) criteria could be euro dominance, which finances projects that benefit the climate or society.

Nearly half of new global green bond issuances last year were in euros, up 28% in dollars, according to Marcus Pratsch, head of sustainable bonds and finance at DZ Bank.

Such securities are in high demand, with orders for 135 billion euros in this week’s 12 billion euro EU green bonds. The US Treasury has not yet issued a green date.

A 2019 survey by Morgan Stanley and IIF found that central banks are eager for more ESG exposure. Japan said last week that it would begin using its reserves to buy ESG securities.

“The euro will… continue to be the most sought-after currency in the sustainable bond market, further cementing its international role,” Pratts predicted.

Businesshala Graphics
Reporting by Dhara Ranasinghe; Additional reporting by Sujatha Rao and Tom Arnold; Editing by Sujatha Rao and Kirsten Donovan

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