Pioneering the Defence Bond market with public support

What led Luxembourg to pioneer the sovereign defence bond market?

Three factors shaped the Government's decision to launch a Defence Bond. First, the strategic context has changed. Europe’s security environment has deteriorated markedly in recent years, requiring all allies, including Luxembourg, to invest more in defence - and to do so faster. After increasing its defence spending to 2% of gross national income (GNI) in 2025, Luxembourg has committed to reaching the NATO objective of 5% of GNI dedicated to defence by 2035.

The Defence Bond was therefore designed as a targeted and transparent funding channel dedicated exclusively to defence related investments, structured around a public Defence Bond Framework and supported by a clear governance process to ensure that proceeds are exclusively allocated to eligible defence investments.

Second, a deliberate choice to involve citizens. From the outset, the political intention, expressed by Finance Minister Gilles Roth and Defence Minister Yuriko Backes, was to give the general public an opportunity to participate directly in the national defence effort. The Defence Bond enables citizens to do so through a simple, secure investment instrument offering a guaranteed fixed return.

Finally, Luxembourg’s pioneering role in finance. Luxembourg has a long track record of financial innovation, whether through its Sustainability Bond in 2020 or its Sukuk Bond in 2014, and launching one of the first sovereign Defence Bonds in Europe in the 21st century continues this tradition. The initiative was also intended to send a signal and pave the way for other countries considering similar citizen focused defence financing instruments, in the spirit of the Savings and Investments Union.

How would you describe the overall response from the market and the general public?

If I had to describe it in one word: remarkable.

The inaugural issuance of EUR 150 million, with a 3‑year maturity and a 2.25% fixed coupon, was fully allocated in less than a day. That speed of allocation is one of the clearest signals of strong demand for a retail product.

Even before the coupon was announced, banks observed significant interest from the general public. This early appetite highlights not only the relevance of the product but also the high level of trust placed in a bond issued by the Government of Luxembourg.

Why did the State Treasury opt for the retail format for its inaugural defence bond?

The government firmly believes that the defence of our nation is not solely the responsibility of institutions, but rather a shared societal effort. By issuing a retail bond, citizens were offered a concrete opportunity to both diversify their savings and actively participate in strengthening our collective security.

At the same time, this approach ensured that increased defence spending did not come at the expense of other essential public priorities. Public borrowing has a unique advantage: it mobilises national solidarity around objectives that benefit all citizens. By subscribing to this bond, individuals were not just making a financial investment, they have contributed to a common national goal.

For these reasons, and to keep participation as accessible and inclusive as possible, we deliberately opted for a plain vanilla retail structure, featuring low entry denominations – starting at EUR 1,000, a retail oriented subscription cap set at EUR 150,000 per person and per bank, and – crucially for Luxembourg residents – an income tax exemption on the interest.

The product was primarily aimed at retail clients, as defined by MiFID II, and was offered through a two phase structure set out in the Information Memorandum.

What can you share about the type of investors that invested in the bond?

Based on the consolidated data presented by Minister Roth in Parliament, we see some interesting figures:

• 2,380 citizens participated in the issuance
• 96,7% of investors were Luxembourg residents
• Participation was truly cross generational, with subscriptions coming from all age brackets, including investors aged 90 and above
• Most subscriptions were below EUR 100,000, and numerous smaller investments were recorded, with 15,4% of all subscriptions below EUR 10,000 and some as low as EUR 1,000

How will the funds raised be invested in a first phase, what specific projects will be financed?

All proceeds will be allocated only to eligible defence expenditures, as defined in the Defence Bond Framework. In practice, the funds will be deployed across the Framework’s eligible categories, which include aviation and drones, communication material, infrastructure, R&D/industrial and dual-use development, space capabilities such as satellite communications, self-protection & equipment, vehicles, and weapons & ammunitions.

The Framework is designed to ensure transparency with clear definitions of eligible categories, governance rules, exclusion criteria, such as the prohibition of any investment related to controversial weapons, and reporting obligations. 

To guarantee accountability, an annual allocation report will be published on the Luxembourg State Treasury’s website until the full amount of proceeds has been allocated. Oversight is ensured by a dedicated committee composed of representatives from the Luxembourg State Treasury, the Ministry of State, the Ministry of Finance, the Directorate of Defence, and the General Inspectorate of Finance.

How does this tie in with the EU’s Retail Investment Strategy and the Savings and Investments Union – can we expect more retail bonds?

The Defence Bond is a practical example of what the EU is trying to achieve: a stronger retail investment culture. It reflects the type of accessible, transparent financial product that European initiatives aim to encourage, namely:

• It is a simple, listed product with a clear use of proceeds, so investors understand what their savings support
• It is distributed through local entities, mainly banks, using existing client onboarding and suitability processes, which supports investor protection
• It channels part of household savings into long term public investment through an instrument that is easy for citizens to grasp

Given the strong uptake, Parliament has invited the Minister of Finance to explore whether similar retail issuances could be used for other policy priorities. Minister Roth has publicly stated that he does not exclude applying this model to other themes, such as for housing or green/sustainable investments, and the State Treasury is currently preparing scenarios for a potential retail housing bond as part of the Government’s wider housing-market initiative.