Asian and European governments have significantly reduced their issuance of dollar-denominated bonds this year. Instead, they are opting to sell bonds in their domestic markets. This shift helps them avoid risks linked to rising U.S. bond yields, currency fluctuations, and growing concerns about government finances.
Data from Dealogic shows that non-U.S. sovereign dollar bond issuance dropped by 19% to $86.2 billion in the first five months of 2025 compared to the same period last year. This marks the first decline in three years.
Country-Specific Bond Issuance Trends
Several governments recorded notable decreases in their dollar bond sales:
Canada’s issuance fell 31% to $10.9 billion.
Saudi Arabia’s dollar bond issuance dropped 29% to $11.9 billion.
Israel’s issuance declined 37% to $4.9 billion.
Poland’s dollar bond issuance fell 31% to $5.4 billion.
At the same time, global sovereign bond issuance in local currencies surged to a five-year high of $326 billion so far this year, according to Dealogic.
Reasons Behind the Shift to Local Currency Bonds
The drop in dollar bond issuance coincides with global investors withdrawing from U.S. assets. This trend partly reflects concerns over tariffs and doubts about the U.S.’s financial dominance and economic security.
Johnny Chen, portfolio manager at William Blair’s emerging markets debt team, explained that the rise in local currency bond issuance is driven mainly by lower domestic interest rates resulting from weaker inflationary pressures. He noted that countries like India, Indonesia, and Thailand have cut their benchmark rates this year.
Chen added, “India’s local currency bond market has matured with its inclusion in global bond indices. This expansion of the investor base may encourage more local currency bond issuance in 2025.”
Brazil and Saudi Arabia’s Diversification Strategies
Brazil is exploring issuing its first sovereign yuan bond. This follows President Luiz Inacio Lula da Silva’s visit to Beijing, where China announced new investments and signed currency swap agreements, according to two government sources.
Meanwhile, Brazil’s sovereign dollar bond issuance has dropped 44% to $2.4 billion this year.
Saudi Arabia recently raised €2.25 billion ($2.36 billion) through euro-denominated bonds. This included its first green bonds and forms part of its strategy to diversify funding sources away from dollar-linked instruments.
Challenges and Future Outlook
Kenneth Orchard, head of international fixed income at T. Rowe Price in London, noted, “Onshore local currency issuance tends to be smaller and less liquid.” However, he expressed optimism about the future, saying, “We expect more international investors to enter these markets over time.”
Overall, the trend reflects a broader move by governments to manage risks associated with dollar borrowing by tapping into local currency markets. This shift may reshape global sovereign bond markets in the coming years.
