Global Government Issuance of US Dollar Debt Declines Sharply in 2025

Introduction

In a significant shift in global debt markets, governments across Asia and Europe are reducing their reliance on U.S. dollar-denominated bonds, opting instead for local currency debt issuance. According to recent data from Dealogic, dollar bond issuance by non-U.S. sovereigns has dropped by 19% in the first five months of 2025, falling to $86.2 billion compared to the same period last year. This marks the first decline in three years, signaling a broader trend of governments seeking to mitigate risks associated with rising U.S. yields, currency volatility, and concerns over U.S. fiscal stability.

Key Trends in Sovereign Debt Issuance

Decline in Dollar Bond Issuance

Several major economies have significantly reduced their dollar-denominated debt issuance in 2025:

• Canada: Down 31% to $10.9 billion
• Saudi Arabia: Down 29% to $11.9 billion
• Israel: Down 37% to $4.9 billion
• Poland: Down 31% to $5.4 billion

This retreat from dollar bonds coincides with a surge in local currency bond issuance, which has reached a five-year high of $326 billion globally.

Shift Towards Local Currency Bonds

Governments are increasingly turning to domestic debt markets, driven by falling interest rates and improved investor confidence in local currency instruments. Countries like India, Indonesia, and Thailand have cut benchmark interest rates in 2025, making local borrowing more attractive.

Johnny Chen, portfolio manager at William Blair’s emerging markets debt team, notes:

"In India’s case, the local currency debt market has matured further with the inclusion of Indian bonds in global indices. This has expanded the investor base, prompting more local currency issuance."

Diversification Away from the Dollar

Emerging markets are also exploring alternative currencies to reduce dollar dependency:

• Brazil is considering its first sovereign bond issuance in yuan, following a currency swap agreement with China.
• Saudi Arabia recently issued €2.25 billion ($2.36 billion) in euro-denominated bonds, including its inaugural green bond tranche, as part of its strategy to diversify funding sources.

Factors Driving the Decline in Dollar Debt

1. Rising U.S. Yields and Currency Volatility

Higher U.S. Treasury yields have increased borrowing costs for foreign governments issuing dollar bonds. Additionally, currency fluctuations add repayment risks, making local currency debt a safer option.

2. Concerns Over U.S. Fiscal Stability

Growing worries about U.S. debt sustainability and political uncertainties have led some investors to reassess dollar-denominated assets. This has prompted sovereign issuers to seek alternative funding routes.

3. Strengthening Local Debt Markets

Many countries have deepened their domestic bond markets, attracting both local and international investors. The inclusion of Indian bonds in global indices, for example, has boosted demand for rupee-denominated debt.

Challenges of Local Currency Issuance

While the shift to local currency bonds offers benefits, it also presents challenges:

• Lower Liquidity: Local currency bonds often have smaller issuance sizes and less trading volume compared to dollar bonds.
• Investor Appetite: International investors may still prefer dollar bonds due to their liquidity and familiarity.

Kenneth Orchard, head of international fixed income at T. Rowe Price, observes:

"The challenge with onshore local currency bonds is that they tend to be smaller and less liquid. But over time, we expect more international investors to enter these markets."

Future Outlook

The trend away from dollar debt is likely to persist as countries prioritize financial stability and reduce exposure to external risks. Key developments to watch include:

• Expansion of alternative currency bonds (euro, yuan, etc.)
• Further integration of emerging market bonds into global indices
• Central bank policies influencing local borrowing costs

Conclusion

The decline in global dollar bond issuance in 2025 reflects a strategic shift by governments towards local currency debt and alternative funding sources. While dollar bonds remain a cornerstone of sovereign borrowing, the rise of domestic and multi-currency debt markets signals a broader transformation in global finance. Investors and policymakers must adapt to these evolving dynamics as the world moves toward a more diversified debt landscape.