What are ‘safe assets’?

In a world of growing uncertainty, there is increasing demand for investments that help mitigate adverse risks. The term ‘safe asset’ often emerges in this context, but what exactly does it mean?

In theory, safe assets are assets that constitute a cushion against certain risks, particularly during recessions (Brunnermeier et al., 2024). Such assets help their owner self-insure against risks that cannot be hedged or diversified in financial markets, such as individual business risks and human capital. They are characterised by their ability to maintain their value or even increase it during economic downturns. They are therefore ‘good friends’ for investors, ready to ‘help’ in any financial trouble.

In practice, government debt in advanced countries is often considered a safe asset. Countries with strong property rights institutions and solid fiscal frameworks are considered among these, as they are less prone to crises (Acemoglu et al., 2003). US debt, for example, tends to appreciate when global economic conditions worsen. The key to this success is the government’s ability to tax the economy and in this way support refinancing of the existing level of its debt in the long term. In the EU context, the ability to credibly commit to sharing risks across member countries is also involved (Ábrahám et al., 2025). Of course, any government debt is safe as long as its issuer finds that the benefits of providing the public with these safe asset ‘services’ outweigh the costs of financing – and it decides not to default on its creditors.

Governments are not the only entities that can supply safe assets. Commercial banks have developed their business models around providing safe liquidity, or money-like debt used for transactions and savings (Dang et al., 2017). However, this model is strongly reinforced by the presence of state deposit insurance schemes (Gorton, 2012). Investment companies have lately been seeking to create their own composite safe assets, featuring a mix of traditional securities (gold and top-rated debt) and “environmentally resilient real estate.” Stablecoin issuers aspire to create a substitute for state-backed securities but are subject to their own risks, e.g. security and fraud risks. Governments compete with these alternatives economically – by building resilient institutions and designing fiscal policies – and with regulation: they have the power to tax, regulate and ban competing safe assets.

Governments of economically developed countries can also compete internationally to reap the benefits from being providers of such assets, which are suitable for trade invoicing and as a reserve currency. Historically, the Dutch Republic, the UK and the US have, at different times, enjoyed the exorbitant privilege of borrowing at very low interest rates, reflecting the value of their debt as a safe asset (Chen et al., 2025). A reversal of fortune occurs when the fiscal situation deteriorates. Even if privileged, the position of the world’s supplier of safe assets can be shaky when government debt burdens are too high.

Will the world see a new safe asset emerge, or will there be no safe assets at all? The latter is a realistic and adverse scenario in which financial fragmentation will lead to greater financial turbulence and poorer growth (Landau, 2025). This transition has not happened yet and might not occur any time soon. Meanwhile, the universal demand for safe assets will prompt various actors to compete in designing workable solutions.

References

Acemoglu, D., Johnson, S., Robinson, J. & Thaicharoen, Y. (2003). Institutional causes, macroeconomic symptoms: Volatility, crises and growth. Journal of Monetary Economics, 50(1), 49-123.

Brunnermeier, M., Merkel, S. & Sannikov, Y. (2024). Safe Assets. Journal of Political Economy.

Chen, Z., Jiang, Z., Lustig, H., Van Nieuwerburgh, S. & Xiaolan, M. Z. (2025). Exorbitant Privilege Gained and Lost: Fiscal Implications. Journal of Political Economy, 133(12), 3713-3761.

Dang, T. V., Gorton, G., Holmström, B. & Ordoñez, G. (2017). Banks as Secret Keepers. American Economic Review, 107(4), 1005-1029.

Gorton, G. B. (2012). Misunderstanding Financial Crises: Why We Don’t See Them Coming. Oxford University Press.