In a dramatic turn in the relationship between politics and finance, a growing chorus of countries and institutions is reconsidering how much US government bonds they want to hold. China has been selling its Treasury holdings in the last one year and so has the Japanese pension funds sold the bonds. Now, the AkademikerPension, one of Denmark’s largest pension schemes, is getting in on the action. In July it announced that it will divest all remaining US government bonds from its multibillion-pound fund by the end of this month. This move represents a smart financial shift. It gives Europe a unique opportunity to spare itself from overreliance on US investments.
The reasons behind this trend are multifaceted. Yet both China and Japan are under domestic economic stresses that force them to bring their foreign investments home. This geopolitical redirection seeks to bolster their increasingly shaky domestic economies under growing authoritarian, populist and ethno-nationalist pressures. As these global powers pull back from US bonds, the ramifications extend beyond immediate financial decisions, hinting at broader geopolitical implications.
The decision to reduce US government bond holdings stems from concerns regarding the financial health of the US government itself. Anders Schelde, Chief Investment Officer at AkademikerPension, stated, “The decision is rooted in the poor US government finances.” Countries and institutions are in turn taking a hard look at their own portfolios. As they do, the rest of US bonds will fall in value, increasing borrowing costs for US government.
We know that European regulators can have a profound effect on this transition. They can pave the way for US pension funds to divest from US bonds. Nervousness about an imminent market downturn is mounting. As US share prices reach levels last observed during the dotcom bubble, investors are growing more concerned about the safety of their holdings.
This decision hasn’t been made in direct response to the growing chill between the US and Europe. That definitely did make the decision more difficult,” Schelde continued. The mood with respect to US bonds has changed, particularly after various rating firms downgraded the United States last year. Nevertheless, these agencies persist in describing US government bonds as a “low risk” or “safe haven” investment.
The consequences of these decisions are starkly illustrated by the rising borrowing costs for the US government. As the bond investors looking to deploy their capital walk away, this pool of capital shrinks further. This situation offers European countries the chance to invest their infrastructure money in more innovative ways. One idea involves establishing a mutualized market for common bonds, denominated in euros. This would allow Europeans to lend to themselves instead of relying on US government bonds.
Three years later, in 2010, the Bruegel thinktank first suggested a “blue bond” scheme. They’ve recently re-jiggered it to more closely match the times. These types of initiatives would enhance Europe’s financial sovereignty while mitigating new vulnerabilities that they might create with US investments.
Now, European institutions are preparing to cut back on their US government bond holdings. They need to in order to counter confusing and harmful global financial trends and priorities that put their interests at stake. This unprecedented movement may redefine investment strategies on both sides of the Atlantic and reshape the future of international finance.