Nations’ debts boost concern

Rich countries’ borrowing is set to hit a record high this year as they have to refinance debt at higher rates, the OECD has said, squeezing many Governments’ spending plans.

Debt issuance across 38 industrialised countries will rise 12 per cent to US$15.8 trillion ($25.6t) this year, according to a report published by the Paris-based organisation.

The total overtakes a previous peak reached in 2020 when Governments were scrambling to support economies at the height of the coronavirus pandemic.

The increase in issuance is largely due to a surge in bonds that need to be refinanced. Higher borrowing costs are set to push Governments’ interest costs in member countries up from 2.9 per cent of GDP last year to 3.4 per cent in 2026, according to the OECD’s estimates, adding pressure to public finances.

OECD secretary-general Mathias Cormann said “a new macroeconomic landscape of higher inflation and more restrictive monetary policies is transforming bond markets globally . . . this has profound implications for government spending and financial stability at a time of renewed financing needs”.

Concerns about governments’ borrowing plans have grown as investors have scaled back forecasts for interest rate cuts on both sides of the Atlantic this year. Having priced in at least six 0.25 percentage point cuts for the Federal Reserve and the European Central Bank in 2024 recently, traders are now betting on only three or four cuts for each.

So far a glut of bond issuance this year has been easily absorbed by markets.

But Robert Tipp, head of global bonds at PGIM Fixed Income, warned that if growth and inflation accelerate in the US — home to half of total OECD sovereign debt — there will probably be “at least a mini replay” of last autumn. In seven weeks benchmark Treasury yields rose from 4.1 per cent to 5 per cent by late October, despite the Fed keeping interest rates steady.