By Anchalee Worrachate - Jan 2, 2013 9:12 PM GMT+0400
People walk down steps in front of the U.S. Capitol building in Washington, D.C. The U.S. will overtake Japan as the nation with the most amount of debt due. Photographer: David Rogowski/Bloomberg
Chris Ratcliffe/Bloomberg
Commuters walk across the River Thames on London Bridge, past Tower Bridge, in London.
The world’s leading economies will have $220 billion less sovereign debt to refinance in 2013, cutting supply after every major government bond market rallied for the first time since the 2008 financial crisis.
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The amount of bills, notes and bonds coming due for the Group of Seven nations plus Brazil, Russia, India and China will drop to $7.38 trillion from $7.60 trillion in 2012, according to data compiled by Bloomberg. Japan, the U.K., Germany, France, Italy and Brazil will see a decline, while the U.S., Canada, Russia, India and China will face an increase.
While high debt loads are blamed for curbing global economic growth, bond investors are encouraged by signs that some nations are starting to rein in spending as they extend the average maturity of their obligations. Instead of rising, borrowing costs are falling as supply decreases, inflation remains in check and central banks from the U.S. to Europe cut interest rates to record lows.
“The progress made in fiscal adjustments has been quite significant in a number of countries, perhaps more than the market is realizing,” said Mohit Kumar, the London-based head of European interest-rate strategy at Deutsche Bank AG, Germany’s biggest bank. “Policy will remain accommodative. I don’t expect to see a selloff in core government bonds. There will be enough demand.”
Broad Rally
Deutsche Bank expects German bonds to outperform French debt even as it forecasts German 10-year yields will probably reach 2.25 percent at the end of 2013, from 1.32 percent at the end of December and compared with the average over the past five years of about 2.85 percent. It also favors Italian notes.
Government securities in 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies generated positive returns last year for the first time since 2008, when Lehman Brothers Holdings Inc. collapsed.
The debt returned about 4.5 percent worldwide on average, led by a 78 percent gain on Greek bonds, based on Bank of America Merrill Lynch’s $23.4 trillion Global Sovereign Broad Market Plus Index. That’s above the average of 3.6 percent in the previous three years and compares with about 4.44 percent the past decade.
Average yields on government bonds have fallen to 1.4 percent from 1.76 at the end of 2011, the index shows.
U.S. Leads
The U.S. will overtake Japan as the nation with the most amount of debt due, with maturities rising to $2.9 trillion this year from $2.6 trillion. The Asian nation’s redemptions will drop to $2.6 trillion from $3 trillion.
Italy’s $414 billion, France’s $357 billion and Germany’s $283 billion round out the top five.
Most developed-nation governments have reduced their refinancing risk by increasing the average maturity of their outstanding debt in the past three years. U.S. debt comes due in 5.4 years on average, up from 4.6 years at the end of 2009, while the U.K.’s rose to 14.6 years from 13.5. Germany, France and Italy have also lengthened their average maturities.
Austerity has its costs. The International Monetary Fund forecast that fiscal tightening in advanced economies will be equivalent to 1 percent of their gross domestic product in 2013, compared with 0.75 percent last year. There will be no “significant fiscal consolidation” in emerging economies this year, the IMF predicted in October.
Growth Drag
“This 1 percent the IMF forecast is important because it will act as a bit of a brake on growth,” said Ewen Cameron Watt, the London-based chief investment strategist at the BlackRock Investment Institute, the research unit of the world’s largest asset manager. “The biggest contributor to growth in the fiscal deficit in the past five years has been shortfalls in revenues. Governments are looking for ways to raise revenues without killing the economy. Growth is going to be modest.”
The IMF cut its forecast for global growth for 2013 to the least since the 2009 recession. The world economy will expand 3.6 percent this year, it said in October. That’s less than the 3.9 percent predicted in July. The Organization for Economic Cooperation and Development, which advises 34 member governments on economic policy, also warned in November of the risk of a “major” global recession.
Sluggish growth will prompt central banks to hold official interest rates at, or near, record lows, according to economists surveyed by Bloomberg News.
Rate Outlook
Policy makers in the U.S., the U.K. and Japan will keep their benchmark rates unchanged this year, while the European Central Bank will cut, based on 178 forecasts compiled by Bloomberg. The Bank of Canada will raise borrowing costs to 1.25 percent, the median forecast showed.
“I couldn’t give you a really bearish argument for government bonds even though they are very expensive,” said Avi Hooper, a money manager in London at Invesco Asset Management, a unit of Invesco Ltd., which oversees $683.8 billion. “The deleveraging period where interest rates stay low in the Group of 10 countries will continue. As long as that’s the case, it will be difficult for bond yields to rise significantly.”
While lethargic growth keeps borrowing costs low, it may derail government efforts to rein in fiscal deficits as it reduces tax revenue, possibly spurring nations to borrow more, said Nick Eisinger, a sovereign analyst at Fidelity Investments, which oversees $1.6 trillion.
Cutting Estimates
“Although things are stabilizing a bit, the overall level of borrowing needs is still very high,” said Eisinger, who is based in London. “The economy is failing to keep up with the growth in debt.”
While bond yields are forecast to rise in countries including the U.S., Germany, Japan, Canada, and China, strategists have been lowering their estimates.
U.S. 10-year Treasury yields will jump to 1.88 percent by mid-year, from 1.76 percent on Dec. 31, according to a weighted average of 80 forecasts compiled by Bloomberg. That’s lower than the 2.96 percent forecast they made in January last year.
Analysts see China’s 10-year bond yields rising to 3.58 percent in the second quarter, from 3.56 percent at the end of 2012. Forecasts in June were for a 3.90 percent yield.
BlackRock, the world largest asset manager, overseeing $3.67 trillion, said it sees “danger in safety” as low yields make government bonds from so-called haven countries vulnerable to any reversal in monetary policy.
Bond Casualties
“Low yield equals high price risk,” the firm wrote in an investment outlook published on Dec. 12. “Markets need only a whiff of a Federal Reserve reversal to empty some of the vast store of investor money in cash and low-yielding fixed-income assets.”
“Casualties” would be assets considered safe such as government bonds from the U.S., U.K., Germany and other core euro-zone countries, the firm wrote.
The decline in debt redemptions in Japan, the world’s third-largest economy, may prove short-lived. The country’s new government, led by Prime Minister Shinzo Abe, has placed a priority on a supplementary budget to boost growth in an economy forecast to shrink for a third-straight quarter in the three months through December. Abe instructed ministries to submit their requests for emergency economic measures and an extra budget by Jan. 7.
The yield on Japan’s 10-year bonds have risen seven basis points, or 0.07 percentage point, to 0.795 percent since Abe’s Liberal Democrat Party won a landslide victory on Dec. 16. Abe also plans to pursue a 2 percent inflation goal, which would potentially erode bond returns in a nation that has grappled with persistent deflation.
Bond Purchases
The Bank of Japan still has scope to buy more bonds as the central bank’s holdings of Japanese government securities stand at 12.1 percent of total debt outstanding, according to UBS AG. That compares with 18.3 percent of Treasuries held by the Fed and 33.4 percent of gilts owned by the Bank of England.
“If the BOJ adopts an inflation target of 2 percent, the pace of bond purchases will have to accelerate again to give the new target some credibility,” UBS strategists Gareth Berry andGeoffrey Yu wrote in a note to clients on Dec. 24. “The Bank of Japan still has plenty of headroom to ease.”
Inflation has stayed dormant, or is forecast to be, in a number of major economies even as central banks kept interest rates at record lows or resorted to measures such as bond purchases to boost growth by capping debt yields, or both.
Inflation Outlook
The Fed has been the biggest buyer of U.S. bonds, flooding the economy with more than $2.3 trillion through three rounds of purchases since the depth of the financial crisis in 2008.
Consumer prices in the U.S. will rise 1.90 percent in 2013 from a year ago, down from a 2.10 percent increase last year, according to analyst forecasts compiled by Bloomberg. In the 17- nation euro area, where the economy is forecast to contract 0.1 percent, the inflation rate will drop to 1.90 percent from 2.50 percent.
Major economies in Europe are cutting down on bond issuance. Germany plans to sell 250 billion euros ($331 billion) of debt this year, compared with 255 billion euros last year, the Federal Finance Agency said on Dec. 20. The country’s borrowing climbed to a record 334 billion euros in 2009.
France announced on the same day it will reduce debt sales by 5 percent this year to 169 billion euros.
The U.K. Debt Management Agency on Dec. 5 lowered its planned issuance for the fiscal year ending March 30 by 200 million pounds to 164.2 billion pounds ($268 billion), the least since fiscal 2009, when the euro debt crisis started.
Fiscal Cliff
In the U.S., Congress passed legislation averting higher income tax for most U.S. workers, breaking an impasse over how to head off the so-called fiscal cliff of $600 billion in tax increases and spending cuts. Lawmakers approved the bill, and it will now go to President Barack Obamafor his signature.
An agreement on how to deal with the fiscal cliff will do little to damp demand for Treasuries, said Akira Takei, head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which oversees about $39 billion. Treasuries fell, pushing 10-year yields up by seven basis points to 1.83 percent at 12:08 p.m. New York time.
“People in the market are thinking that an agreement on the fiscal cliff will take them back into a risk-on environment, but it won’t,” Takei said before the latest budget negotiations. “It’s not about avoiding austerity but how to execute austerity. An agreement will make the cliff less steep but won’t flatten it.”
Following is a table of projected bond and bill redemptions and interest payments in dollars for 2013 for the Group of Seven countries, Brazil, China, India and Russia using data compiled by Bloomberg as of Dec. 28:
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
