Are there any safe haven countries left?

Most countries have seen their safe haven characteristics worsen, but not Switzerland

A few weeks ago, I wrote a post about how the US’ exorbitant privilege - its ability to issue lots of debt at low interest rates without the Dollar going into free fall - has been deteriorating for many years. This deterioration coincides with the rapid rise in US debt, which has outpaced the rest of the G10.

The way I quantified this loss in the exorbitant privilege was to calculate the differential of the 10-year Treasury yield minus the trade-weighted average 10-year yield on gov’t bonds in Germany (DE), Japan (JP), the UK (GB), Canada (CA), Switzerland (CH), Sweden (SE) and Australia (AU), using 10-year currency forwards to hedge non-US yields back into Dollars. The resulting rate differential is thus purely in Dollar terms and therefore a good proxy for the “convenience yield,” i.e. whether global markets are willing to buy US debt at lower yields than debt from other countries because Treasuries are “special.”

In today’s post, I replicate this calculation for three other advanced economies: the UK, Germany and Switzerland. In the case of the UK, this means calculating the 10-year yield differential versus the other countries in my sample, again using 10-year currency forwards to hedge non-UK yields back into British Pound terms. I then do the same for Germany and Switzerland. I use daily data from Bloomberg starting in January 2010 through yesterday.

The four charts above show what this differential looks like for the US (top left), the UK (top right), Germany (bottom left) and Switzerland (bottom right). As I noted in my earlier post, the US has seen this differential go from negative to positive, meaning that it used to be able to issue debt more cheaply than other countries when everyone is converted into Dollars, but no longer. This deterioration has played out over the past decade, with the switch from negative to positive happening around 2016.

In the case of the UK, the rise in the differential is more recent and more substantial, a sign that the UK is increasingly having to issue debt at higher cost, which is why the current government is being forced to pursue fiscal consolidation. For Germany, it is still the case that the differential is negative, but it has been rising also, a sign that the “specialness” of German debt is eroding. The only country with rising “specialness” is Switzerland, with its differential going increasingly negative in recent years.

The number of safe haven countries is rapidly shrinking. Fiscal recklessness has eroded the US safe haven status and has similarly damaged the UK. Germany still counts as a safe haven, but its recent debt splurge and softening up of the debt brake is taking a visible toll. Only Switzerland is seeing its safe haven characteristics strengthen over time. Switzerland is the only true safe haven country these days.