Governments of the world’s leading economies have more than US$7.6-trillion of debt maturing this year, with most facing a rise in borrowing costs.
Led by Japan’s US$3-trillion and the U.S.’s US$2.8-trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from US$7.4-trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.
Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4% from a prior estimate of 4.5% as Europe’s debt crisis spreads, the U.S. struggles to reduce a budget deficit exceeding US$1-trillion and China’s property market cools.
“The weight of supply may be a concern,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees US$121-billion, said in a Dec. 28 telephone interview. “Rather than the start of the year being the problem, it’s the middle part of the year that becomes the problem. That’s when we see the slowdown in the global economy having its biggest impact.”
Competition for Buyers
The amount needing to be refinanced rises to more than US$8-trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.
“It is a big number and obviously because many governments are still in a deficit situation the debt continues to accumulate and that’s one of the biggest problems,” Elwin de Groot, an economist at Rabobank Nederland in Utrecht, Netherlands, part of the world’s biggest agricultural lender, said in an interview on Dec. 27.
While most of the world’s biggest debtors had little trouble financing their debt load in 2011, with Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index gaining 6.1%, the most since 2008, that may change.
Italy auctioned 7-billion euros (US$9.1-billion) of debt on Dec. 29, less than the 8.5-billion euros targeted. With an economy sinking into its fourth recession since 2001, Prime Minister Mario Monti’s government must refinance about US$428-billion of securities coming due this year, the third-most, with another US$70-billion in interest payments, data compiled by Bloomberg show.
Rising Costs
Borrowing costs for G7 nations will rise as much as 39% in 2011, based on forecasts of 10-year government bond yields by economists and strategists surveyed by Bloomberg in separate surveys. China’s 10-year yields may remain little changed, while India’s are projected to fall to 8.02% from about 8.39%. The survey doesn’t include estimates for Russia and Brazil.
After Italy, France has the most amount of debt coming due, at US$367-billion, followed by Germany at US$285-billion. Canada has US$221-billion, while Brazil has US$169-billion, the U.K. has US$165-billion, China has US$121-billion and India US$57-billion. Russia has the least maturing, or US$13-billion.
Rising borrowing costs forced Greece, Portugal and Ireland to seek bailouts from the European Union and IMF. Italy’s 10-year yields exceeded 7% last month, a level that preceded the request for aid from those three nations.
Bad Combination
“The buyer base for peripheral Europe has obviously shrunk at the same time that the supply coming to the market is increasing, which is not a good combination,” said Michael Riddell, a London-based fund manager at M&G Investments, which oversees about US$323-billion.
The two biggest debtors, Japan and the U.S., have shown little trouble attracting demand.
Japan benefits by having a surplus in its current account, which is the broadest measure of trade and means that the nation doesn’t need to rely on foreign investors to finance its budget deficits. The U.S. benefits from the dollar’s role as the world’s primary reserve currency.
Japan’s 10-year bond yields, at less than 1%, are the second-lowest in the world, after Switzerland, even though its debt is about twice the size of its economy.
The U.S. attracted US$3.04 for each dollar of the US$2.135-trillion in notes and bonds sold last year, the most since the government began releasing the data in 1992. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for US$30-billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.
Tougher Year
With yields on 10-year Treasuries below 2%, an increasing number of investors see little chance for U.S. bonds to repeat last year’s gains of 9.79%. The U.S pays an average interest rate of about 2.18% on its outstanding debt, down from 2.51% in 2009, Bloomberg data show.
‘Given how well they have done, we don’t think they’re any longer a very good hedge,” Eric Pellicciaro, head of global rates investment at New York-based BlackRock Inc., which manages US$1.14-trillion in fixed-income assets, said in a Dec. 16 telephone interview.
The median estimate of 70 economists and strategists is for Treasury 10-year note yields to rise to 2.60 percent by year-end from 1.94% at 10:03 a.m. London time. In Japan, the forecast for the nation’s benchmark note yield is 1.35%, while it’s expected to rise to 2.50% in Germany, from 1.93% Tuesday.
Central Banks
Central banks are bolstering demand by either keeping interest rates at record lows or reducing them, and by purchasing bonds through a policy know as quantitative easing.
The Federal Reserve has said it will keep its target rate for overnight loans between banks between zero and 0.25% through mid-2013, and is now selling US$400-billion of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.
The Bank of Japan has kept its key rate at or below 0.5% since 1995, and expanded the asset-purchase program last year to 20 trillion yen (US$260-billion). The Bank of England kept its main rate at a record low 0.5% last month, and left its asset-buying target at 275 billion pounds (US$426-billion).
The European Central Bank reduced its main refinancing rate twice last quarter, to 1% from 1.5%. It followed those moves by allotting 489-billion euros of three-year loans to euro-region lenders. That exceeded the median estimate of 293-billion euros in a Bloomberg News survey of economists. The central bank will offer a second three-year loan on Feb. 28.
‘Flush With Liquidity’
The money from the ECB may be used by banks to buy government bonds, according to Fabrizio Fiorini, the chief investment officer at Aletti Gestielle SGR SpA in Milan.
“The market is now flush with liquidity after measures taken by central banks, particularly the ECB, and that’s great news for risky assets,” Fiorini said in a telephone interview on Dec. 20. “The market will have no problem taking down supply from countries like Spain and Italy in the first quarter. In fact, they should be able to raise money at lower borrowing costs than what we saw in recent months.”
Italy’s sale last week included 2.5-billion euros of 5% bond due in March 2022, which yielded 6.98%. That was down from 7.56% at an auction Nov. 29. It also sold 9-billion euros of bills on Dec. 28 at a rate of 3.251%, compared with 6.504% at the previous auction on Nov. 25.
‘Phony War’
Investors should be most worried about the period after the ECB’s second three-year longer-term refinancing operation scheduled in February, according to Ignis’s Thomson.
“The amount of liquidity that has been supplied by central banks, with more to come from the ECB in February, suggests the first couple of months will be a sort of phony war as far as the supply is concerned,” Thomson said.
The ECB has bought about 212-billion euros of government bonds since starting a program in May 2010 to contain borrowing costs for Greece, Portugal and Ireland. It began buying Spanish and Italian debt in August, according to people familiar with the trades, who declined to be identified because they weren’t authorized to speak publicly about the transactions.
“There’s a lot of talk that the ECB might have to give more direct support to the governments,” Frances Hudson, who helps manage about US$242-billion as a global strategist at Standard Life Investments in Edinburgh, said in a Dec. 22 telephone interview.
Financial Post
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