The world’s biggest economies will need to refinance about 6.3 percent less debt this year than in 2014 as austerity measures help shrink budget deficits.
The amount of bills, notes and bonds coming due for the Group of Seven nations plus Brazil, China, India and Russia will decline to $6.96 trillion from $7.43 trillion, according to data compiled by Bloomberg. As redemptions in major developed economies drop, those in key emerging markets will rise, reversing the trend in recent years.
Add greater budget discipline to the list of reasons -- including slowing inflation, and a scarcity exacerbated by central-bank purchases -- that explain why bonds are rallying. Yields that ended last year at less than 1.6 percent on average are a boon for governments and companies, enabling them to replace higher-coupon securities with lower-cost ones. Rates are even below
zero on shorter maturities in nations including France, Germany and Japan and Switzerland.
“The fiscal picture has improved in most places after years of austerity measures,” David Keeble, the New York-based head of rates strategy at Credit Agricole SA, one of the top five primary dealers of German securities, said in a phone interview on Dec. 18. “The global outlook is one of improving growth and low inflation, and that helps borrowers,” he said.
Consumer Benefits
Bonds of all types returned 7.8 percent in 2014, the most since 2002 when they gained 8.9 percent, according to the Bank of America Merrill Lynch Global Broad Market Index. Yields ended last year at 1.57 percent, after falling to a record 1.5109 percent on Oct. 15. They were at 2.10 percent on Dec. 31, 2013. The benefits may filter down to consumers, who will enjoy low rates on everything from mortgages to car loans.The rally continued on the first trading day of 2015, with the 10-year Treasury note’s yield falling six basis points, or 0.06 percentage point, on Jan. 2 to 2.11 percent. Germany’s five-year yield turned negative as bond prices in the euro region soared amid speculation the European Central Bank will soon start buying government bonds to stave off the risk of deflation.
U.S. 10-year notes yielded 2.12 percent today at 8:38 a.m. London time.
Jeffrey Gundlach, whose DoubleLine Total Return Bond Fund beat more than 90 percent of its peers over the past three years, told Barron’s the rally in Treasuries has further to go. Gundlach got it right in 2014 by predicting bond-market gains when the median forecast among economists surveyed by Bloomberg projected a selloff.
Breathing Room
Low yields may give sovereign issuers extra breathing room as they consider further cuts to borrowing that soared in developed markets in the wake of the financial turmoil of 2008 and Europe’s ensuing debt crisis.At that time, governments’ spending rose as they bailed out financial institutions and tax receipts dropped as a result of recession. Concerned that high debt loads might cause international investors to stop buying their bonds, nations subsequently reduced spending and increased taxes as they sought to restore fiscal discipline.
High Debt
Budget deficits in developed nations will average 3.4 percent of their economies this year, down from a peak of 8.3 percent in 2009, according to the Organization for Economic Cooperation and Development.“The bigger picture doesn’t change,” said Steven Major, HSBC Holdings Plc’s London-based head of global fixed-income research. “Debt levels among governments remain very high.”
When interest payments are included, the amount of debt that needs to be refinanced by the G-7 countries plus the BRIC nations increases by about $723 billion to $7.7 trillion, according to the data compiled by Bloomberg.
In the U.S., the world’s largest borrower with a record $12.4 trillion of marketable debt outstanding, the amount of government securities due this year, at $3.02 trillion, is about $97 billion lower than in 2014. Japan, where bonds are underpinned by the central bank’s quantitative-easing program, will see redemptions fall to $2.08 trillion from $2.38 trillion.
Slower Inflation
Lower bond rates helped France save 3.7 billion euros ($4.4 billion) in debt-servicing costs last year, data from Agence France Tresor showed. In the U.S., interest on Treasuries as a proportion of gross domestic product dropped to 2.5 percent, from 3.1 percent in 2008, according to the Treasury Department.Investors have yet to balk at low yields, as slower inflation preserves the value of fixed-income payments. While economists surveyed by Bloomberg say the world economy will expand 2.8 percent in 2015 from the 2.4 percent projected for 2014, they estimate the inflation rate will stabilize around 2.4 percent as falling oil and commodities curb price pressures.
Continued low yields aren’t assured. With the U.S. economy growing at the fastest pace in a decade and the Federal Reserve no longer buying bonds, calls for higher Treasury yields, the world’s benchmark, are the most aggressive since 2009.
The yield on 10-year Treasuries will rise to 3.01 percent by the end of 2015, according to the median of analyst estimates compiled by Bloomberg. Britain’s 10-year yield may rise to 2.75 percent, from 1.75 percent today.
‘Risks Around’
“The recovery in the U.S. and the U.K. has probably become entrenched enough for their respective central banks to prepare the ground for higher rates,” John Wraith, head of U.K. rates strategy at UBS Group AG in London, said in a phone interview on Dec. 30. “But there are still an awful lot of risks around.”The potential for 10-year Treasury yields rising to 3.5 percent to 4 percent would be unlikely “unless we get a big surprise in wage growth,” Wraith said.
In Europe, Germany said in December the government will sell 185.5 billion euros in bonds and bills in 2015, the lowest amount since 2002. That’s 15.5 billion euros less than last year. All of the issuance will be used to refinance or redeem debt, according to the Federal Finance Agency.
Italy’s redemptions will drop 12 percent to $410 billion. France, a country plagued by a stalling economy and record joblessness, will need to refinance $361 billion, down from $410 billion last year. AFT, which manages the country’s debt, said on Dec. 18 it will sell 187 billion euros of bonds this year, compared with 173 billion euros last year.
China, Russia
Refinancing needs among the biggest emerging-market economies will rise, led by China where the amount of maturing debt increases by 26 percent to $180 billion. Russia, faced with economic sanctions and tension on its border with Ukraine, will also see higher redemptions.One risk for emerging markets is that their exchange rates may weaken against the dollar should the Fed raise rates, making it harder for them to repay foreign-currency debt.
“If the Fed were to choose to let U.S. rates go up, that would strengthen the dollar by pulling money in from other parts of the world,” said Dan Fuss, whose Loomis Sayles Bond Fund beat 98 percent of peers over the past five years. “This could create a problem as it could further weaken emerging economies that already have some pressure. What happens to the rest of the world would be a constraint for the Fed.”
Following is a table of projected bond and bill redemptions and interest payments in dollars for 2015 for the G-7 countries, Brazil, China, India and Russia using data compiled by Bloomberg as of Dec. 30 (in billions of dollars):
Country Bond/Bill Redemptions Coupon Payments U.S. 3,018 229 Japan 2,077 77 Italy 410 71 France 361 50 Germany 223 33 U.K. 215 71 Canada 194 11 China 180 64 Brazil 175 58 India 96 51 Russia 13 8
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