This week Bloomberg reported that next year may see sovereign bond sales increase as budget deficits increase across the developed world.
The outlet noted that as this is happening, central banks are trying to reduce their own massive bond holdings, which built up during periods of quantitative easing, adding to the supply.
Bloomberg wrote, “This double whammy means bond yields, particularly at the longer end of the curve, are set for a difficult 2024,” adding that it would be wise if the US Federal Reserve, the European Central Bank, and the Bank of England were to reduce their hopes of drawing down their balance sheets.
In the report, the Bank of America pointed out the the issuance of Treasury bonds is projected to reach a record $1.34 trillion in 2024. At the same time, in 2026, the US budget deficit is forecasted to be approaching $2 trillion.
The report acknowledged that there a numerous factors which affect the value of bonds, however “the one constant in an ever-changing world is rising debt issuance.”
Since June of 2022, according to reports, the US Federal Reserve has been trimming its balance sheets by $95 billion per month, cutting it to $7.8 trillion so far, which is almost twice the $4 trillion it stood at prior to the pandemic.
Bloomberg wrote that there is a continued risk that it will prove “deadly” to continue to combine monetary tightening by the Fed with an expansion of the US Treasury supply.
The report noted the same situation is brewing in the EU, where bond sales are expected to rise to more than €1.1 trillion ($1.2 trillion) in Germany, France, Italy, and Spain next year. In addition, the European Commission is also forecasting the issuance of €150 billion of bonds.
The report concludes that even reducing quantitative easing by a small amount would appear to be ill-advised, and that “the first line of defense” for the euro area is to allow maturing German debt to get recycled into the purchase of Italian bonds.
The report notes that next year, the supply of UK government bonds will be around £260 billion, an increase of 20% over this year. The Bank of England has been shrinking its balance sheet at twice the rate of the Federal Reserve and the ECB.
The report said, “There’s a growing perception that central banks are at the zenith of the interest-rate hiking cycle, but reducing QE bond portfolios would continue to tighten monetary conditions,” noting that it is likely that the slump in economic growth globally next year will likely hit just before there is a cut in rates, or a pause in the reduction of balance sheets, and likely both.
