Fourth, there is a huge demand for safe assets around the world. Safe assets play a crucial economic role. Some investors seek high, risky returns, but many just want a safe place to store their wealth. That includes businesses looking for somewhere to stash their cash holdings, workers close to retirement and also savers in emerging market economies that lack comprehensive pension schemes or a stable currency. In addition, banks are mandated through regulation to hold safe assets, while official investors such as central banks accumulate foreign reserves in order to stabilise their own currencies and financial markets.
As the strongest economy in the world and the issuer of the world’s reserve currency, US government debt is the benchmark safe asset. But European public debt is also viewed as safe, with a few exceptions. The EU’s first batch of bonds, issued to fund the bloc’s COVID-19 assistance packages, attracted huge interest from financial markets. Prices were high and interest rates low. That demand for safe assets will remain high for the foreseeable future – in fact, the crises since 2008 have only raised it, as the world is perceived to be less safe than before. And even if all advanced economies have much higher public debt after this pandemic, there are very few assets that risk-averse investors can turn to instead. No matter what is happening in the world, European public debt will remain among the safest of assets, keeping borrowing costs low.