Reversing QE will transform bond markets
A new “landscape of higher inflation and more restrictive monetary policies is transforming bond markets globally at a pace not seen in decades”, says Mathias Cormann, secretarygeneral of the OECD club of developed nations. “This has profound implications for government spending and financial stability.”
The OECD’s Global Debt Report 2024 reports that sovereign and corporate outstanding bond debt stood at almost $100trn worldwide last year, a figure similar in size to global GDP. Of this, $34trn was corporate-bond debt and about $64trn sovereign debt owed by governments.
Low interest rates between 2008 and 2022 allowed many governments to lock in low borrowing costs, but roughly 40% of sovereign bonds and 37% of corporate bonds globally will mature by 2026 and will need refinancing, probably at today’s much higher rates. The problem for governments is exacerbated because previous rounds of borrowing were absorbed by central banks as part of their “quantitative easing” policies in the 2010s. Yet they are now reversing this (“quantitative tightening” or QT), which will leave debt markets with an even larger volume of government debt to absorb.
Between them, the US, European, British and Canadian central banks reduced their security holdings from $11.5trn in 2021 to $10trn in 2023, says Mary McDougall in the Financial Times. A further $1trn in QT is projected for this year.
The ratio of government debt to GDP among the OECD’s 38 member countries has fallen or flatlined for the past three years. Yet it is expected to start rising again in 2024 to an average of 84% of GDP (the UK figure is currently about 98%). Debt issuance across the OECD will thus rise 12% this year to a record $15.8trn, surpassing the 2020 peak as states borrowed to pay for Covid lockdowns.