The Geopolitics of Bonds 3.0
Neutral debt is on its way out
Earlier this year, the US did something quite spectacular. In July, it passed the GENIUS Act to regulate stablecoins—a type of cryptocurrency that is pegged to a commodity or currency to ensure stability. It marked a further “normalization” of crypto within the global economy. But, within the legislation, was something far bolder: a 1:1 ratio rule. Any issuer of dollar-denominated stablecoins in the US will need to have equal liquid assets, specifically US dollars or bonds. This means, if X business issues $50,000 worth of stablecoins, it must also have either $50,000 in cash (USD) or own $50,000 in US bonds.
Through the GENIUS Act, America aimed at de-dollarization.
The White House was stimulating a new appetite for US dollars and US bonds within the US and across the world. America was reinforcing its financial order at a moment when US-led globalization was (and still is) fracturing.
The GENIUS Act is one of several significant developments over the past several months that point to a new interplay between geopolitics, bonds, and the broader financial world. While geopolitics and bonds have always danced together, what is forming now is new. The idea that issuing a cryptocurrency requires purchasing US bonds (or holding US dollars) is a new reality, underpinned by geopolitics (e.g., America’s need to keep the greenback the main currency of the world).
The growing global rivalries are forcing governments to switch gears in how their financial systems function. This is no longer about capital controls, interest rates, or currency manipulation, the old geopolitical drivers. There is far more at play that every global stakeholder must prepare for.
👁 GEOPOLITICAL FORESIGHT ON THE FINANCIAL ORDER
Some may be wondering why this is 3.0. What makes it a third variation?
The first phase of geopolitics of bonds occurred after World War II ended, and America’s financial tools and ideas dominated the world without competition. The second phase occurred after the Cold War ended, and countries like China began to quietly play with finance to accelerate their geoeconomic rise. The third phase is underway now, as global players wake up to each other and take profound action to protect their interests—within the bonds space and beyond it.
At the core of what is occurring is that the new bond rules and setups are driven in large part by geopolitics. How nations are fighting is defining how regional and global bond markets function, not just central bank planning, government debt appetite, or recession.
Emergence of GeoBonds
So far, the geopolitics of bonds has mainly been about a few things, such as:
Foreign holders of government bonds attempting to leverage (e.g., China saying it could dump US treasuries, raising borrowing costs for the US, weakening the dollar, creating global economic uncertainty)
Investors selling government bonds as punishment for state decisions, causing government collapse (e.g., Liz Truss’ tenure as British prime minister came to an end after her tax cuts caused investors to dump British bonds)
Rush to certain bonds as global stakeholders seek safety from a “shock,” be it geopolitical, disease, or other (e.g., a cyber attack in the EU causing a rush to US treasuries)
This is the standard bread-and-butter of geopolitics and bonds.
However, now something new is forming—what could be described as “geobonds.” Nations are beginning to sell bonds to their closest geopolitical partners, shunning what others expect or want. This divides the globe as global rules struggle to maintain a certain “order.”
For example, coinciding with Russian President Vladimir Putin’s visit to China at the end of August, Beijing and Moscow cemented a new deal that integrates their financial spheres more tightly. The Chinese government will reopen its domestic bond market to Russia, specifically Russian energy companies like Gazprom and Rosatom, that have not been completely sanctioned (only subsidiaries have). These firms will be allowed to sell “panda bonds” in the Chinese market, allowing them to sell debt and raise capital in Renminbi.
This means several things at once.
First, China is effectively ignoring the Western sanctions on Russia, reopening its economy to Russia’s biggest companies at a moment when the Ukraine war is flaring and the West is threatening harsher action against Moscow and those who support it (including China and India).
Second, China is giving Russia a powerful source of funding, beyond direct energy sales. Starting with Russian energy giants, Russian firms can raise money in mainland China. This cash could then be used in a variety of ways:
If it cannot be moved back to Russia, then Russian firms could either buy Russian imports in China (creating artificial demand for Russian goods) or pay for Chinese exports going to Russia.
If the cash can be moved back to Russia, it gives the Kremlin access to a growing credit line, potentially measuring in the billions once the gears start moving.
This creates a new kind of trade corridor on the back of bond sales.
Lastly, China is taking its Yuan to new heights. Alongside Kenya converting some USD-denominated debt into China’s currency, now Russian businesses could be selling debt in Yuan too. This further erodes the dollar from the Russia-China trading relationship, valued at over $240 billion.
Surrounding all this, Russia’s reliance on Western capital markets is diminishing as it concentrates its attention on Asian economies.
What is taking place between China and Russia—still in its early stages—represents the rise of geobonds. Bonds that are bought and sold purely for geopolitical reasons. In the case of the new panda bonds in China, it is not just Russia that is gaining a new source of credit, which could then be used to purchase Russian imports and bring them into the Chinese market. It is also how China and Russia are becoming more reliant on each other. The new source of economic blood for Russia is China. And, the new vehicle to globalize the Yuan is Russia.
Bond Realignment
Alongside the geobonds between China and Russia, there is a new bond realignment forming in Europe, as geopolitics causes nations to go their separate ways. The war in Gaza, for example, has resulted in Ireland calling for strict measures against Israel. In response, Israel has shifted its issuance of sovereign bonds in Europe from Ireland to Luxembourg.
This might not sound like a big deal. But it means that geopolitics is limiting how and where certain bonds are sold. In 2022, after the first Western sanctions salvo against Russia, the Russian government reopened its bond market but only allowed what it deemed “non-hostile actors” to access the security, fearful that foreign actors could destabilize the bond market on purpose.
Just as Russia limited entrance into its bond market, so too, Israel is facing limits in who is willing to actually issue its bonds in Europe—and the world. This is a new “bond realignment” where bonds are being issued not because of the size of the bond market or access to dollars, but geopolitical alignment (or neutrality). In this case, Luxembourg is a neutral financial hub.
What makes this even more significant is that Israel’s bond issuance has a different term: war bonds.
“…the Israeli central bank projects that the Gaza war alone could cost 250 billion shekel ($66.5 billion) by 2025, from the current cost of about 100 billion shekel ($26.3 billion). This means Israel’s war with Hamas could cost over 12% of the Israeli GDP. Add to this, in Q3 2024, funding for Israel’s tech scene was down 20%, compared to the same time last year.”
From the insight Fallout Looms as Western Allies Divide Over Israel.
Israel needs to raise capital to fund its geopolitics—from Gaza to Iran. This means whoever is issuing the Israeli bonds is putting themselves in the crosshairs of nations that are angry at Israel’s conduct. They might see Luxembourg as helping Israel fund its wars. Could the next fight be between Turkey and Luxembourg (and the EU) over Israeli bond sales?
Put differently, nations could soon signal their geopolitical alignment based on whose bonds they sell or in what currency they are sold in. Tomorrow, BRICS may decide to issue bonds in Yuan, meaning BRICS states would issue bonds within the Chinese market, raise funding in Renminbi, to offset America’s outlandish behavior and political uncertainty. And in the process, signal how deep they are standing in the Chinese orbit.
Geopolitics is driving a new bond realignment. And, the new bond realignment could end up driving new geopolitics.
Conclusion
Bonds do not get the same attention as AI, chips, or new economic corridors. They are not as sexy or flashy. However, that does not take away from how integral they are to the global economy and financial system. Many nations depend heavily on bonds to function. And, for the first time, the US treasuries could find themselves in the most unfamiliar waters if polarization and political division rise in the country, creating global shockwaves.
Surrounding all this are the geopolitical fires raging across the globe. Like in other avenues, these fires are beginning to trickle into established arenas (like bonds), creating the most unexpected outcomes, like geobonds or new bond realignment.
This does not change the integrity of bonds. But it changes how the world views them, approaches them, and treats them. Geopolitics could soon become the catalyst for the next bond decisions, for the next bond boom or bust.
Once again, geopolitics is supplanting everything else, taking the steering wheel of whatever it infects or interacts with. Bonds used to be about security, assurance, and long-term planning. Today, they are becoming about picking sides, new geoeconomic integration, and, strangely, offsetting the actions of a country (the US) whose bonds are still considered one of the world’s safest assets.
-ABISHUR PRAKASH AKA. MR. GEOPOLITICS
Mr. Geopolitics is the property of Abishur Prakash/The Geopolitical Business, Inc., and is protected under Canadian Copyright Law. This includes, but is not limited to: ideas, perspectives, expressions, concepts, etc. Any use of the insights, including sharing or interpretation, partly or wholly, requires explicit written permission.
Have questions or thoughts? Let’s talk: mrgeopolitics@substack.com
If you like Mr. Geopolitics, your colleagues might too.
Feel like doing something unique for somebody important?