Sovereign funds shift bond issuance beyond dollar markets as funding competition intensifies

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Sovereign funds bond market shift

Highlights

Sovereign wealth funds, holding about $16.5 trillion in assets, are increasing issuance in local currencies like the Chinese renminbi and Australian dollar to diversify funding sources.
Benchmark 10-year government bond yields in the 10 largest developed economies have climbed by an average of 81 basis points this year, raising issuance costs.
Higher yields and intense private capital demand for AI infrastructure are crowding out emerging markets, which face rising debt-service burdens and struggle to finance critical projects.

Funding markets diversify amid rising issuance costs

As reported by Reuters, local currency debt markets including the Chinese renminbi, Australian dollar, Hong Kong dollar and Singapore dollar are attracting greater interest from sovereign wealth funds and other issuers seeking to diversify their funding base.

Stephanie von Friedeburg, Citi's global head of public sector group, says public-sector borrowers and private corporates are now competing more directly for a limited pool of capital. Speaking on the sidelines of the IMF and World Bank meetings in Bangkok, she says the pressure is being driven in large part by sovereigns' growing borrowing needs.

Sovereigns and other public-sector investors are increasingly turning to debt markets to finance infrastructure, energy security, defence and development priorities. At the same time, private capital is chasing AI-driven opportunities, adding to the competition for financing and lifting the cost of issuance.

Despite the change in issuance patterns, von Friedeburg says the U.S. dollar is set to remain the dominant global reserve currency for the foreseeable future because no other market matches its depth and liquidity.

Emerging markets face sharper pressure from capital squeeze

Sovereign wealth funds remain the world's largest group of institutional investors, with total assets of about $16.5 trillion this month, according to Global SWF tracking data. The broader rate backdrop is also becoming more challenging, with benchmark 10-year government bond yields in the 10 largest developed economies rising by an average of 81 basis points so far this year, Fitch says earlier this week.

Von Friedeburg says higher yields in developed markets, combined with large volumes of private capital tied up in AI infrastructure, are crowding out developing countries. Those economies are already dealing with heavy debt-service burdens and limited fiscal room, making it harder to fund energy, transport and digital investment needs.

She adds that emerging markets are likely to struggle to finance essential development projects unless alternatives such as debt-for-development swaps are used. Rising gold prices are also prompting reserve managers to explore hedging, liquidity management and borrowing against gold reserves.

In our earlier coverage of the IMF’s Asia-Pacific outlook, we outlined expectations for slower growth across Asia in 2026–2027 as higher energy prices and tighter financial conditions weigh on the region. We also highlighted the IMF’s warning that rising global yields could amplify volatility in exchange rates, capital flows and bond markets, lifting debt-servicing costs and increasing spillover risks for Asian sovereign borrowing.

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