Rebalancing needs create fresh opportunities for SSAs

On a summer day in August 2011, three of S&P’s sovereign rating analysts were about to reveal one of the most important decisions in their professional careers — downgrading the US to an AA+ rating from AAA for the first time. They made their decision as they believed the political division in US at the time would add to the fiscal and economic challenges facing the country.

S&P announced the downgrade anyway, and the rest — the furious reaction from the White House to Wall Street and the worst daily stock market sell-off since the Global Financial Crisis — is history.

Yet history has repeated itself: almost exactly 12 years later, Fitch dropped the US by one notch from AAA .

And less than two years after that, in May 2025, Moody’s finally took the plunge and did the same.

Only this time around, the market reacted in a much more measured — almost muted — fashion.

That is not to say, however, that investors have become oblivious to the challenges the US is once again facing, and the devastating knock-on effects these could have on the global economy. Almost a century since the stock market crash of 1929, the quip of “when America sneezes, the rest of the world catches a cold” never grows old.

They just saw it coming. The US’s debt ballooned, the cost of servicing it skyrocketed, and on many occasions — for instance, since the infamous ‘liberation day’ tariff announcement — prices and yields of US Treasuries behaved in a way atypical of their safe-haven status.

“Even before the latest Moody’s downgrade, investors had already adjusted to the new reality that the risk-free dollar benchmark is no longer triple-A rated,” says Rong Ren Goh, portfolio manager, fixed income, Eastspring Investments in Singapore.

The recent volatility in US Treasury yields and their spreads relative to interest rate swap rates has caused fixed income investors to wonder whether they have accumulated too big an exposure to a single market, that is, the US Treasury market, and are sitting on a portfolio with too high a concentration in a single currency — the dollar.

Some have described the ‘sell America’ trades in both fixed income and equities markets, whereas others have thought a ‘de-dollarisation’ trend has taken shape across asset classes globally. Many also see it as a diversification opportunity.

The million-dollar question: what should one buy as an alternative to US Treasuries, or even dollar bonds?

It was perhaps no coincidence that over the last couple of months, a number of SSA issuers have noticed new — or renewed — interest in their euro bonds. Some public sector borrowers in the EMEA (Europe, Middle East and Africa) and Asia Pacific regions also observed this about their dollar bonds.

“We did see that investors wanted to take some time in order to reposition themselves in dollars and during this time, they are buying euros, which is very positive in terms of demand for us,” says a French agency issuer.

“What I have heard during the last few weeks’ travel is that investors want to have more options for their portfolios,” says one supranational issuer. “There is more interest in looking at the euro area government bonds, for example, and to a certain extent supranationals based in EMEA or Asia.

“It’s been very interesting to listen to people’s thoughts on whether the eurozone sovereign market is liquid enough and whether there are enough risk-free, quality assets in the eurozone.”

One European borrower which sold a dollar bond recently noticed that in particular, “Asian investors are back for us”.

“We are currently seeing it in dollars, but there could be a further shift from dollars to euros as the confidence and trust in Trump wane,” he says. “We’ve already seen that [shift] in mainland Europe and UK, and now it could be in Asia too.”

The issuer’s next planned benchmark will be a euro one, and he is “curious” if it is possible to identify such a shift “if Asian investors are also coming back to buying more euros, like they’ve done in the early 2000s,” he adds. “Back then we had 15%-20% of Asian shares in our order books. It’d be interesting if we could see that again.”

Petra Wehlert, head of capital markets at KfW in Frankfurt, already noticed something different in her bank’s new €4bn five year green bond issued in mid-May.

“It’s hard to make a trend out of just one deal but from the distribution of our last five year green bond, we do see more and more investors with larger tickets buying our bonds out of Asia,” she says. “If we compare the stats this time with our last deal of the same maturity, the evidence is in the numbers. For us, that is a sign that we are going in this direction.”

Asian investors had an 18% participation of that recent KfW deal. The issuer sold a five year euro bond — a conventional line — around the same time last year which had a 7.8% allocation to Asia.

“We do see diversification as an interesting story these days,” says Lei Zhu, head of Asian fixed income at Fidelity International in Hong Kong. “Investors realise it’s good to have a more diversified portfolio even if they still want to stay invested in the US dollar and US Treasuries.

“But while people are looking for diversification into stable and the quality assets, liquidity is important, and quality is important,” Zhu adds. Therefore for those who have started to think about alternative diversification, “the triple-A rated SSA assets are very valuable”.

“Currency-wise, the interest is in those with an appreciation potential [against the dollar], so the countries running a trade surplus would be favourable,” she says, adding that from that perspective, investing in the euro and yen bond markets — both are also large and liquid markets — comes as “a natural choice”.

Zhu also notes that newer SSAs, to which most investors do not have much exposure but offer a slightly wider spread, also provide some investment opportunities.

Eastspring’s Goh says from an asset manager’s perspective, “it’s nice to show my client a portfolio with everything as high as possible — both credit rating and yield”.

“And this is where SSAs actually come into the picture,” he adds. “Because even though I cannot buy US Treasuries as triple-A anymore, I can still buy triple-A rated supranationals and agencies.

“And these are quite flexible investments, too, because there are quite a number of them in the market, so you do get to choose which issuer and which tenor, and comparatively, they don’t require significant amounts [of investments] each time.”

Based on their spread target, investors can then go for the strongest triple-As for as little concern as possible, or choose those issuers with a slightly wider spread due to their lower rating or shorter track record of issuing, he notes.

“There is an appeal for SSAs because it’s highly flexible and almost customisable,” says Goh. “But in the world of finance and capital markets, there is no such thing as a free lunch. And in the case of SSAs, while you can get them in hard currencies like dollar and euros and the liquidity is also reasonable, they will never be as liquid as US Treasuries.

“It’ll be a trade-off between the potential liquidity with a higher carry versus the risk-free rate.”

One supranational issuer in Europe says he has received more questions about the institution’s euro issuance as investors try to diversify their investment choices.

“What we have seen lately is a positive for the euro area, and I think the euro area is going to benefit from all this,” he says. “But it of course needs to be seen if the trend is to be continued — it’s too early to confirm it, even though the initial signs are definitely positive.”

Other large issuers think similarly.

“Going forward, my assumption would be that the euro market will become more international,” says KfW’s Wehlert.

“We are probably looking more at a trend of the internationalisation of the euro market, rather than de-dollarisation,” she says. “Judging by the numbers, it does feel like everyone wants a more balanced portfolio and because our bonds are fairly liquid, we could potentially benefit from that. I’m looking forward to seeing the next few deals.”

A peer European agency issuer noticed that his last euro bond had a “quite standard” allocation outside of its home investor base of Europe, of about a quarter. What stood out to him instead was the euro market’s ability to attract more interest from issuers instead.

“In the euro market we are seeing an increase in issuers able to issue — for example, the Canadians and Australians who have joined this market with new benchmark supply,” he says.

“It shows that the market continues to develop, and that there is also the political will to further develop the Capital Markets Union which is also very good.”

All issuers have cautioned, however, that any shifts that have been observed are at the “very initial stage” and they need to see further evidence of any fundamental change in investor behaviour, or for such a change to lead to any meaningful adjustment to the issuance pattern of public sector entities.

“The demand for our recent euro deal was one of the strongest that we’ve ever seen and that’s encouraging, but I don’t think we can read too much into it what it says about investor appetite for euros versus dollars,” says one issuer who primarily funds in dollars.

“For sure, a lot of investors are beginning to ask, is there some sort of rebalancing that’s appropriate? But we haven’t considered changing our dollar benchmark issuance plan for the rest of the funding year,” he says. “We are confident as ever about being able to issue dollars.”

But demand from the bank’s lending side is just as important as the demand on the funding side, he adds.

“What we do is also linked to whether our lending clients are demanding dollar or non-dollar loans,” the issuer says. “We are flexible around what we are able to offer, and if there’s something unfolding, it’ll affect our funding too, but it’s probably way too early to tell if there’s any shift in demand on the loan terms from dollar to non-dollars.”

A second European agency issuer thought that while interest is growing outside of the US Treasury market, such interest, even if fully translated to actual demand, is unlikely be enough to move the needle.

“Investing in supras and agencies — it’s an easy box to tick when it comes to things like HQLA, risk weighting and sovereign guarantees,” he says. “But in general, the ‘too big to fail’ status of the US Treasury market is still there, and we all know that the biggest holdings of Treasuries outside of the US are from Japan and China and while Japanese and Chinese investors are probably looking at other options, would someone see us, with about €10bn a year to fund, as a surrogate for US Treasuries? The answer is probably no.”

Even so, several Europe-based borrowers also highlighted the importance of staying connected or to reconnect with accounts outside their home investor base.

“It was definitely helpful to be on the road recently as it helped us understand what those investors are doing at the moment and why they are doing it,” says one of them.

“If they are not buying US dollars, what do they do? Are they buying new currencies, or something else? Are they buying gold? Asian central banks are notably buying so much gold, but it is not the only thing that they buy.”

Others warn about underestimating the impact of investors’ rebalancing or diversifying.

“Because the pool of dollar assets is so big,” Fidelity’s Zhu says, “if international investors start to move to other markets, even though those markets are relatively small, the impact could be quite big.”