NewsRescue
Bloomberg reported this week that sovereign bond sales could climb further next year as developed-world budget deficits expand.
This comes at a horrible moment, according to the outlet’s analysis, because central banks have expedited the liquidation of massive bond holdings built through quantitative easing.
“This double whammy means bond yields, particularly at the longer end of the curve, are set for a difficult 2024,” Bloomberg said, advising the Federal Reserve of the United States, the European Central Bank, and the Bank of England to temper their enthusiasm for lowering their balance sheets.
According to the study, Treasury bond issuance is likely to hit a record $1.34 trillion next year, according to Bank of America. Meanwhile, the US deficit is expected to reach $2 trillion by 2026.
According to the paper, various factors influence bond prices, but “the one constant in an ever-changing world is rising debt issuance.”
Since June 2022, the US Fed has reportedly been shrinking its balance sheet by $95 billion every month, bringing it to $7.8 trillion, roughly double the pre-pandemic $4 trillion record.
The concern remains that the combination of Fed monetary tightening and rising US Treasury issuance would be “deadly,” according to Bloomberg.
The same might be said for the EU, where Germany, France, Italy, and Spain are scheduled to sell more than €1.1 trillion ($1.2 trillion) in bonds next year. The European Commission is also set to issue bonds worth €150 billion.
According to the research, even a minor reduction in QE reinvestment is ill-advised, given that it is “the first line of defence” for the eurozone, allowing ageing German debt to be recycled into purchasing Italian notes.
Meanwhile, the supply of UK government bonds is forecast to be around £260 billion next year, up 20% from this year. The Bank of England has been cutting at twice the rate of the Fed and the ECB.