By Harry Robertson
LONDON (Reuters) – Global bond markets face the largest volume of net sovereign issuance since the start of the year in June, just as economic data casts doubt on rate cuts, putting tests the hitherto strong appetite of investors for debt.
The net supply of government bonds is expected to reach $340 billion for the United States, euro zone countries and Britain, according to data from bank BNP Paribas, as redemptions fall and central banks continue to reduce their securities holdings.
Although analysts expect markets to absorb the supply, it could increase upward pressure on yields – which move inversely to prices – and spook investors who were hoping that declines in rates would spur a bond market recovery this year.
Two weak U.S. Treasury auctions on Tuesday may have been an early sign that the market, already grappling with strong economic data that has caused traders to push back their bets on when central banks will begin cutting interest rates, finds it difficult to remain optimistic.
“We still have a lot of supply to absorb,” said Camille de Courcel, head of G10 rates strategy for Europe at BNP Paribas, adding that the euro zone would see its second month of net issuance this year on highest so far. June.
De Courcel said she was reluctant to buy longer-term bonds in June, even though the European Central Bank is likely to cut interest rates, as economies recover and supply is strong. “We are very aware of the risks of rising (yields) as we approach June, particularly in Europe,” she said.
Governments in developed markets continue to borrow large sums to help their economies recover from the shocks of the COVID-19 pandemic and the energy crisis triggered by Russia’s invasion of Ukraine. Elections in the United States and Britain, as well as those for the European Union Parliament this year, are increasing pressure to maintain spending.
Central banks, meanwhile, are reducing their bond holdings in a process known as quantitative tightening. The Federal Reserve has let $95 billion of government and mortgage-backed bonds mature without replacement each month, although this is expected to slow from June, while the Bank of England actively sells off debt on the market.
Investors have so far been eager to jump in, with Britain seeing record demand in March for 30-year inflation-indexed bonds. Euro zone countries have already taken advantage of investor appetite to sell around 53% of their debt for the year, according to BNP Paribas, compared to 45% at the same time last year.
“It’s been incredibly well digested, I would say, and to some extent it’s a bit surprising,” said Michael Weidner, co-head of global fixed income at Lazard Asset Management. He added that many investors are now attracted by higher yields after years of near-zero yields, as well as the likelihood of a price rally when central banks begin their easing cycles.
June’s high net supply is largely due to a decline in maturing bonds, so investors, without the repayment of principal, have less cash to reinvest in the primary market.
“This (mismatch) has never proven to be a major problem,” Weidner said. “The banks… will, I believe, take on a substantial share of the gross supply, being well aware that redemptions the following month will be higher, and they will be able to arrange to sell the book.”
Investor concerns about government borrowing tend to focus on long-term rising debt levels around the world, particularly in the United States, where the country’s Treasuries are seen as one of the safest assets in the world.
The Congressional Budget Office said in a March report that it expects the U.S. public debt to reach 166% of GDP in 2054, up from 99% this year.
“At some point, if we continue to see growing deficits at this level all over the world, then you should see investors demanding a higher risk premium to lend, particularly for longer maturities,” Michael said Goosay, global head of fixed income at Principal Asset. Management.
“But in the short term, between central banks continuing to be, to some extent, the buyer of last resort, as well as fears of slowing growth and the need for central banks to relax their policy… that determines how investors position themselves.”
(Reporting by Harry Robertson; Editing by Kirsten Donovan)
