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Investors are warning governments around the world over “unmoored” levels of public debt, saying excessive pre-election borrowing promises risk sparking a bond market backlash.
Government debt issuance in the US and the UK is expected to soar to the highest level on record in the coming year, with the exception of the early stages of the Covid pandemic.
Emerging markets are set to add to the deluge of bond sales, after government debt climbed to an all-time high of 68.2 per cent of GDP last year, according to the Institute of International Finance.
Deficits are “out of control and the real story is that there’s no mechanism for bringing them under control”, said Jim Cielinski, global head of fixed income at Janus Henderson.
He added that the issue would become a serious concern to markets “in the next six to 12 months as something that matter(s) a lot”.
The US Treasury will issue around $4tn of bonds this year with a maturity of between two and 30 years according to estimates from Apollo Global Management, up from $3tn last year and $2.3tn in 2018.
Net issuance, which is adjusted for Federal Reserve purchases and existing debt falling due, will be $1.6tn over 12 months to the end of September according to calculations by RBC Capital Markets, the second highest year on record. The Canadian bank estimates that net issuance in 2024-2025 will surpass pandemic-era levels.
The scale of borrowing is likely to distract markets from their more typical focus on the future path of interest rates, fund managers say.
“We are truly in an unmoored environment for government debt compared with previous centuries,” said Robert Tipp, head of global bonds at PGIM Fixed Income. “Everyone is getting a pass right now, whether you are in the US or Italy, but there have been some signs recently that investors and rating agencies are starting to think about this again.”
The UK, where an election is expected this year, is also on course for its second-highest year of debt sales, behind only 2020 when the Bank of England stepped in to hoover up supply during the early stages of the coronavirus pandemic. Issuance net of BoE purchases and including its gilt sales is expected to be about three times more than the average over the past decade.
Sir Keir Starmer, whose Labour party enjoys a substantial lead in the polls, has scaled back a promise to borrow £28bn a year for its “green prosperity plan” amid concerns about the level of public debt.
Sir Robert Stheeman, head of the UK’s debt management office, warned in an interview with the Financial Times last week that “in a world where we have debt to sell, policymaking cannot be divorced from the reality of the market.”
In Europe, ten of the eurozone’s largest countries will issue around €1.2tn of debt this year, around the same level as last year, according to estimates from NatWest. But the bank expects net issuance — which includes the impact of quantitative tightening and excludes refinancing existing bonds — to rise by around 18 per cent this year to €640bn.
Scrutiny of debt levels comes in an historically busy year for elections that boosts the incentives for political leaders to raise spending. As the US gears up for its presidential election on November 5, there is little sign of appetite for fiscal restraint from the main contenders across the political divide, say investors.
“Given the two apparent frontrunners . . . it doesn’t seem like much will change even when the election is over and they will continue to spend at a high level,” said David Zahn, head of European fixed income at Franklin Templeton, referring to President Joe Biden and his likely opponent, former President Donald Trump. “Eventually that could create a problem for the US.”
The US budget deficit as a proportion of gross domestic product is set to hover between 6.5 per cent and 8 per cent over the next four years, according to forecasts from the IMF, a sharp increase from less than 4 per cent in 2022. Interest payments are forecast to rise from less than 3 per cent of GDP in 2022 to 4.5 per cent by 2028.
The IIF, which acts as a global trade group for the finance industry, warned that a swath of elections and ongoing geopolitical frictions in the emerging world “raise concerns about increased government borrowing and fiscal discipline, including India, South Africa, Pakistan and the US.
“If upcoming elections lead to populist policies aimed at controlling social tensions, the result could be still more government borrowing and still less fiscal restraint,” the IIF said, adding that an abrupt surge in government expenditures during this global election cycle “could further increase the interest burden for many sovereign debtors — from already high levels”.