By Harry Robertson
LONDON (Reuters) – Global bond markets are set to face the biggest net issuance of government bonds so far this year in June, just as economic data casts doubt on interest rate cuts, testing previously strong investor appetite for debt stated.
Net supply of government bonds for the United States, eurozone countries and Britain is likely to rise to $340 billion as redemptions decline and central banks continue to reduce their holdings of government bonds, according to data from lender BNP Paribas .
While analysts expect markets to absorb the supply, it has the potential to increase upward pressure on yields – which move opposite to prices – and deter investors who had hoped that rate cuts would fuel a bond market rally this year .
A pair of weak U.S. Treasury auctions on Tuesday may have been an early sign that the market, already struggling with strong economic data that has led traders to dial back their bets on when central banks will cut rates, is struggling has to remain optimistic.
“We still have a lot of supply to be absorbed,” said Camille de Courcel, head of G10 rates strategy for Europe at BNP Paribas, adding that the euro zone had the second highest month of net issuance yet this year will know. June.
De Courcel said she is wary of buying longer-dated bonds in June, even though the European Central Bank is likely to cut rates as economies recover and supply is strong. “We are very aware of the risks that rates will start to rise as we move into June, especially in Europe,” she said.
Developed market governments are still borrowing large sums to help their economies recover from the shocks of the COVID-19 pandemic and the energy crisis sparked by Russia’s invasion of Ukraine. The elections in the United States and Britain, and for the Parliament of the European Union this year, are increasing the pressure to keep spending.
Central banks, meanwhile, are reducing their bond holdings in a process known as quantitative tightening. The Federal Reserve has been letting $95 billion of government bonds and mortgage-backed bonds mature each month without replacement, although that will slow from June as the Bank of England actively sells debt back to the market.
Investors have been keen to act so far, with Britain seeing record demand for 30-year inflation-linked bonds in March. According to BNP Paribas, eurozone countries have benefited from investors’ willingness to sell around 53% of their debt already this year, up from 45% this time last year.
“It’s been insanely well digested, I would say, and that’s a little bit surprising to some extent,” said Michael Weidner, co-head of global fixed income at Lazard Asset Management. He said many investors are now attracted to higher rates after years of near-zero returns, and by the likelihood of a rise in prices as central banks begin their easing cycle.
The higher net supply in June is largely driven by a decline in maturing bonds, so that without principal repayment, investors have less money to reinvest in the primary market.
“That (mismatch) has never been a big problem,” Weidner said. “Banks…will, I think, account for a substantial part of the gross supply, because they are well aware of the fact that next month’s repayments will be higher, and they will be able to to sell a book.”
Investors’ concerns about government bonds tend to focus on the longer-term rise in debt levels around the world, especially in the United States, where the country’s government bonds are considered among the safest assets in the world.
The Congressional Budget Office said in a March report that it expects the U.S. national debt to rise from 99% this year to 166% of GDP in 2054.
“At some point, if we continue to see rising global deficits at these levels, you should see investors demanding a higher risk premium to borrow, especially for longer maturities,” said Michael Goosay, Global Head of Fixed Income at Principal Asset. Management.
“But in the short term, between central banks still being the buyer of last resort to some extent, and concerns about a slowdown in growth and the need for central banks to ease policy… are positioning.”
(Reporting by Harry Robertson; Editing by Kirsten Donovan)
