Bond yields have risen substantially in developed countries, with central banks offloading their vast holdings
Sovereign bond sales could increase further next year as budget deficits balloon across the developed world, Bloomberg reported this week.
According to the outlet’s analysis, this comes at a bad time as central banks have accelerated the reduction of huge bond holdings amassed through quantitative easing.
“This double whammy means bond yields, particularly at the longer end of the curve, are set for a difficult 2024,” Bloomberg wrote, suggesting the US Federal Reserve, the European Central Bank, and the Bank of England should curb their enthusiasm for shrinking their balance sheets.
According to the Bank of America, cited in the report, Treasury bond issuance is expected to reach a record $1.34 trillion next year. Meanwhile, the US deficit in 2026 is projected to climb towards $2 trillion.
The report indicated that multiple factors affect bond values, but “the one constant in an ever-changing world is rising debt issuance.”
The US Fed has reportedly been trimming its balance sheet by $95 billion a month since June 2022, reducing it so far to $7.8 trillion, nearly double the pre-pandemic $4 trillion mark.
The risk remains that the combination of monetary tightening by the Fed with expanding US Treasury supply will prove “deadly,” Bloomberg wrote.
The same could be observed in the EU where Germany, France, Italy and Spain are expected to increase bond sales to more than €1.1 trillion ($1.2 trillion) next year. The European Commission is also expected to issue €150 billion of bonds.
Even a small reduction of QE reinvestment looks ill-advised, according to the report, while it’s “the first line of defense” for the euro area that allows maturing German debt to be recycled into buying Italian bonds.
Meanwhile, UK government bond supply is expected to be around £260 billion next year, a jump of 20% from this year. The Bank of England has been reducing at double the pace of the Fed and ECB.
“There’s a growing perception that central banks are at the zenith of the interest-rate hiking cycle, but reducing QE bond portfolios would continue to tighten monetary conditions,” Bloomberg wrote, noting that the potential global growth slump next year may come shortly before rate cuts or a pause in balance sheet reduction, or probably both.
