Governments explore alternative currency bonds as funding tightens

Governments and state-backed borrowers are increasingly exploring bonds denominated in currencies other than the US dollar as competition for capital drives up financing costs, a senior Citigroup banker said on Thursday.

Stephanie von Friedeburg, Citi’s global head of the public sector group, said demand for financing from governments and private companies was placing pressure on available investment capital, with artificial intelligence infrastructure attracting substantial private funding.

Speaking on the sidelines of the International Monetary Fund and World Bank meetings in Bangkok, she identified the Chinese renminbi, Australian dollar, Hong Kong dollar and Singapore dollar as markets attracting interest from issuers seeking more diversified funding sources.

The shift reflects a growing challenge for governments seeking to finance infrastructure, energy security, defence and development programmes while competing with companies investing heavily in computing capacity and other AI-related projects.

Von Friedeburg said sovereign borrowers and private corporations were competing for a limited pool of capital in a way not seen for many years. Governments’ expanding borrowing requirements were a central driver of that competition, she said.

The pressure is visible in sovereign debt markets. Fitch Ratings said this week that benchmark 10-year government bond yields across the world’s 10 largest developed economies had risen by an average of 81 basis points since the beginning of 2026.

A basis point represents one hundredth of a percentage point, making the average increase equivalent to 0.81 percentage points. Higher yields generally translate into more expensive borrowing when governments issue new debt or refinance maturing obligations.

The figures underline the financing constraints facing public borrowers even in major advanced economies. For lower-income governments, which often pay higher risk premiums and have less access to deep domestic capital markets, the consequences can be more severe.

Von Friedeburg warned that developing economies were being crowded out as borrowing costs increased and large amounts of private capital were committed to AI infrastructure. Many were already struggling with heavy debt-servicing obligations and extremely limited fiscal flexibility.

She said alternative arrangements, including debt-for-development swaps, could help countries secure financing for essential energy, transport and digital infrastructure. Such transactions can link changes to existing debt obligations with commitments to specified development expenditure, although their terms and benefits depend on the individual agreement.

The interest in non-dollar issuance does not necessarily mean governments are abandoning dollar markets. Borrowers can use several currencies to broaden their investor base, manage financing costs and reduce reliance on any single source of demand.

Issuing in another currency can nevertheless introduce exchange-rate exposure if a government’s revenues and reserves are concentrated elsewhere. Hedging that exposure also carries costs, which can reduce or eliminate any apparent saving from lower interest rates.

Von Friedeburg emphasised that the dollar was likely to retain its position as the dominant global reserve currency for the foreseeable future. She pointed to the depth and liquidity of dollar markets, which competing currencies cannot currently match.

Her assessment distinguishes diversification of sovereign borrowing from a wholesale change in the international monetary system. The ability to raise money in additional markets offers flexibility, but does not itself establish that those markets can absorb issuance on the scale available in dollars.

The IMF has separately warned that elevated government borrowing requirements and rising sovereign yields pose risks to financial stability. Its October assessment also identified vulnerabilities associated with AI investment, including the possibility that weaker returns could trigger broader financial market adjustments.

Those warnings highlight competing pressures in capital markets. Investment in AI infrastructure can support economic activity, but financing requirements may overlap with government issuance at a time when public debt burdens and interest expenses are already elevated.

Market conditions are also shifting as investors reassess the profitability and financing structures of AI projects. Changes in demand for technology-related securities can influence flows into government bonds, complicating the outlook for borrowing costs.

Von Friedeburg also pointed to the implications of higher gold prices for public-sector reserve management. She said reserve managers were examining hedging arrangements, liquidity management and borrowing against gold holdings as possible ways to make use of existing assets without necessarily selling them.

Global sovereign wealth fund assets stood at approximately $16.5 trillion this month, according to Global SWF tracking data. These funds are major institutional investors, although their investment activities are distinct from the borrowing undertaken by governments and other state entities.