From Defense to Housing, Luxembourg Steps Up Retail Bonds Push

Bob Kieffer, director of the Luxembourg State Treasury Source: Luxembourg Ministry of F

Article content

(Bloomberg) — Luxembourg’s successful sale of defense bonds has encouraged it to again turn to retail investors, this time with securities that will help fund affordable housing.

Article content

The country, one of Europe’s wealthiest, plans to raise €250 million ($286 million) by selling three-year housing bonds to mom-and-pop investors, Bob Kieffer, director of the Luxembourg State Treasury said in an interview. The sale, planned for January, is part of the government’s strategy to engage retail investors, especially for purpose-led bonds.  

Article content

Article content

Article content

Luxembourg raised €150 million in February through three-year defense bonds, the first European Union nation this century to sell securities earmarked for military spending to the general public. The issue, which paid a 2.25% coupon, sold out within a day, encouraging the government to increase the size of its planned housing bond.

Article content

Article content

“We’ve seen that there is actually demand from Luxembourg retail investors,” Kieffer said. “It also helps us in developing a new type of investor beyond the institutional investor.”

Article content

Read: Should the UK Issue War Bonds When It Isn’t at War? Explainer

Article content

With a gold-plated triple-A credit score from all three major ratings agencies and a debt-to-GDP ratio of less than 30% — under half of Germany’s — Luxembourg isn’t turning to households out of funding pressure. Instead, its initiative reflects a worldwide trend of governments courting retail buyers, often using tax incentives, to broaden their investor bases.

Article content

But Luxembourg’s success with purpose-led retail bonds could also offer a template for more indebted nations that are looking to harness people’s savings for national priorities. In the UK for instance, there has also been talk of ‘war bonds’ as Prime Minister Andy Burnham’s administration looks at ways to fund the depleted military.

Article content

Article content

Purpose-led bonds are particularly suited to the retail space, according to Kieffer, who sees the energy transition as another potential theme for future issuance. 

Article content

“Storytelling is important,” he said “That’s something where you can easily convey the story to the retail investor.”

Article content

He expects Luxembourg’s retail bond market could eventually grow to as much as €1 billion, out of the total €26.5 billion sovereign debt stock.

Article content

“We are still in the early stages and there’s still experimentation to be done,” he said. “If this is a success and it catches on, we might come to a situation where we have recurring issuances.”

Article content

Still, the government is reluctant to grow the retail market much beyond that, given it would compete with bank deposits. 

Article content

“Offering very safe investment products that are perceived like an alternative to savings accounts, that’s what we’re looking at here,” Kieffer said. “We don’t want to take too much out of the banking system.”

Article content

Article content

Article content

Article content

Article content