An alternative to US Treasuries?

The European Union has just issued the first bonds under its (AAA rated) EUR900 billion Recovery Fund – known as SURE bonds – to provide coronavirus relief to European Union nations.

10 year and 20 year bonds were offered. EUR10 billion of the 10 year bond and EUR7 billion of the 20 year bond were issued, at yields of -0.238% and 0.131% respectively. Demand was exceptionally strong. EUR233 billion of bids were received, more than 13 times the amount of bonds issued.

Significantly, 37% of the 10 year bond and 13% of the 20 year bond were taken up by central banks. Part of the attraction of these bonds was their yield advantage over the equivalent German Bunds (36.7 basis points and 52.1 basis points respectively). However, the yields on these new SURE bonds were well below those of equivalent US Treasury bonds.

Clearly, investors are eager for an alternative to US Treasuries. Investor demand for lower yielding European sovereign bonds and the recent reduction in China’s official holdings of US Treasuries and its increase in holdings of Japanese Government Bonds are two prominent examples of this search.

The SURE bonds’ auction result also signals a vote of confidence in the Eurozone and EUR as a global reserve asset. This comes at a time when not only is the US dollar’s dominant role being questioned for economic, political and fiscal reasons, but also central banks and institutional investors are seeking an alternative (to the US) for their safe haven and reserve investments.