Investors warn governments worldwide about “unmoored’ levels of public debt. They say excessive borrowing promises made before elections could spark a bond market reaction.
The US and UK are expected to issue the most government debt in history in the next year. This is with the exception that the Covid pandemic was still in its early stages.
According to the Institute of International Finance, emerging markets will add to the flood of bond sales after government debt reached a record high of 68.2% of GDP in 2017.
Jim Cielinski is the global head of fixed-income at Janus Henderson. He said that deficits are “out of hand” and there is no way to bring them under control.
He said that this issue will become a major concern for markets “in six to twelve months, as it is something that matters a lot”.
Apollo Global Management estimates that the US Treasury will sell around $4tn worth of bonds with a maturity of two to 30 years this year, compared to $3tn last and $2.3tn for 2018.
RBC Capital Markets calculated that net issuance adjusted for Federal Reserve purchases, existing debt due and other factors, would be $1.6tn in the 12 months ending September, making it the second highest annual issuance. RBC Capital Markets estimates that the net issuance for 2024-2025 is expected to surpass levels seen during pandemic era.
The scale of borrowing is likely to distract markets from their more typical focus on the future path of interest rates, fund managers say.
Robert Tipp, the head of global bonds for PGIM Fixed income, said that we are in a truly unmoored situation when it comes to government debt compared to previous centuries. “Everyone in the US and Italy is getting a free pass at this time, but recently there are signs that investors and rating companies are beginning to take this issue again.”
In the UK, where elections are expected to be held this year, the debt sales will also reach their second highest level, only behind 2020, when the Bank of England intervened in the early stages of a coronavirus outbreak. The UK’s debt sales, including those of the Bank of England and excluding the purchases made by the BoE, are expected to be three times higher than average in the last decade.
Sir Keir, whose Labour Party enjoys a substantial poll lead, has backed down on a pledge to borrow PS28bn per year for the “green prosperity plan”, amid concerns over the level of the public debt.
Sir Robert Stheeman is the head of UK’s Debt Management Office. You can also read about the warnings below. In an interview conducted last week, it was stated that “in a market where debt is available to be sold, policymaking can’t be separated from the realities of the markets.”
NatWest estimates that ten of Europe’s biggest countries will issue €1.2tn in debt this year. This is about the same as the previous year. The bank estimates that net issuance, which excludes refinancing of existing bonds and includes the effects of quantitative tightening, will rise 18% this year to €640bn.
The scrutiny of debt levels is coming in a historically busy year for election, which increases the incentive for politicians to increase spending. Investors say that as the US prepares for the presidential election in November, there are few signs of fiscal restraint among the major candidates.
“Given that the two obvious frontrunners are. . . David Zahn, the head of European Fixed Income at Franklin Templeton said that it does not seem as if much will change after the election, and that they will continue spending at a high rate. He was referring to former President Donald Trump, who is likely to be Joe Biden’s opponent. “Eventually, that could cause a problem for US.”
According to IMF forecasts, the US budget deficit, as a percentage of GDP, is expected to range between 6.5% and 8% over the next four-year period, up from less than 4% in 2022. Interest payments will rise from less that 3% of GDP in 2020 to 4.5 % by 2028, according to IMF forecasts.
IIF, a global trade association for the finance sector, has warned that geopolitical tensions and a wide range of elections in emerging countries “raises concerns about increased borrowing by governments and fiscal discipline. This includes India, South Africa and Pakistan.”
The IIF stated that if upcoming elections result in populist policies to control social tensions, it could lead to more government borrowing, and less fiscal restraint. It also added that a sudden surge in government spending during this global electoral cycle “could increase the interest burden of many sovereign debtors – from already high levels”.