Earlier this week, Luxembourg raised €2.5 billion on the global capital market, but household investors were not able to participate in the sale.
The Grand Duchy’s ten-year bonds, with a coupon of 2.9%, were fully subscribed – on 10 September – in less than three hours. In fact, demand far exceeded supply. But there were no individual investors among these bond buyers, only European institutional players. That means banks, asset managers, insurance companies and European institutions. Why is that?
Philippe Ledent, economist at ING Belgium and Luxembourg © Photo credit: Lex Kleren
“Quite simply because it costs the state less,” explained Philippe Ledent, economist at ING Belgium and Luxembourg.
“In the institutional market, you find companies that have to invest their portfolios and can therefore accept lower returns,” he said. “And then, it’s also a question of ease. It’s easier to deal with players investing €300 or €400 million than with hundreds or thousands of individuals. The administrative cost is also lower.”
Repaying bonds costs Luxembourg state less than neighbouring governments
Belgian example
Unlike Luxembourg, other European governments like Belgium continue to sell bonds to retail investors. In 2025, of the €50 billion that the Belgian government plans to raise, €250 million will be reserved for the general public. “It’s important to maintain a link with citizens,” said Ledent. “If, in the future, the markets become too tight, the Belgian state knows that it will be able to turn to its small bondholders.”
This type of strategy is not necessary in Luxembourg, whose financial solidity means that it does not need to take such precautions. “The Luxembourg state has no financing problems,” said Ledent.
With a debt ratio limited to 27.7% of GDP – much lower than that of its French (114%), Belgian (107%) or even German (62%) neighbours – the country has an AAA rating, the best possible. The risk of default is therefore virtually nil, which reassures institutional investors. As a result, Luxembourg has no trouble finding buyers on the markets.
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Would private investors have been interested?
One question remains: would private investors have been interested in these bonds? Ledent is not so sure.
“Is the yield of 2.9% really attractive?” he asked. “Given the fairly long duration – 10 years – and the illiquid nature of this bond – because there are few of them on the markets – there is a risk of having to resell it at a loss in the event of a rapid need for liquidity.” Especially as there are corporate bonds on the market offering much more liquid instruments.
This is hardly a problem for institutional investors, who are used to long-term commitments.
(This article was originally published by Virgule. Translated using AI, edited by Aaron Grunwald.)
