By Keith Jenkins and Anchalee Worrachate
Governments of the world’s leading economies have more
than $7.6 trillion of debt maturing this year, with most facing a rise in
borrowing costs.
Led by Japan’s $3 trillion
and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven
nations and Brazil, Russia, India and China
is up from $7.4 trillion at this time last year, according to data compiled by
Bloomberg. Ten-year bond yields will be higher by year-end for at least seven
of the countries, forecasts show.
Investors may demand higher compensation to lend to countries that struggle
to finance increasing debt burdens as the global economy slows, surveys show.
The International Monetary Fund cut its forecast for growth this year to 4
percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads,
the U.S. struggles to reduce a budget deficit exceeding $1 trillion and China’s
property market cools.
“The weight of supply may be a concern,” Stuart Thomson, a money
manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion,
said in a Dec. 28 telephone interview. “Rather than the start of the year being
the problem, it’s the middle part of the year that becomes the problem. That’s
when we see the slowdown in the global economy having its biggest impact.”
Competition for Buyers
The amount needing to be refinanced rises to more than $8 trillion when interest
payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on
notice for possible downgrades, the competition to find buyers is heating up.
“It is a big number and obviously because many governments are still in a
deficit situation the debt continues to accumulate and that’s one of the
biggest problems,” Elwin de Groot, an economist at Rabobank Nederland in
Utrecht, Netherlands, part of the world’s biggest agricultural lender, said in
an interview on Dec. 27.
While most of the world’s biggest debtors had little trouble financing their
debt load in 2011, with Bank of America Merrill Lynch’s Global Sovereign Broad
Market Plus Index gaining 6.1 percent, the most since 2008, that may change.
Italy auctioned
7 billion euros ($9.14 billion) of debt on Dec. 29, less than the 8.5 billion
euros targeted. With an economy sinking into its fourth recession since 2001,
Prime Minister Mario Monti’s government must refinance about $428 billion of
securities coming due this year, the third-most, with another $70 billion in
interest payments, data compiled by Bloomberg show.
Rising Costs
Borrowing costs for G-7 nations will rise as much as 39 percent from 2011,
based on forecasts of 10-year government bond yields by economists and
strategists surveyed by Bloomberg in separate surveys. China’s 10-year
yields may remain little changed, while India’s are projected to fall to 8.02
percent from 8.36 percent. The survey doesn’t include estimates for Russia and
Brazil.
After Italy, France has the
most amount of debt coming due, at $367 billion, followed by Germany at $285
billion. Canada has $221
billion, while Brazil has $169 billion, the U.K. has $165 billion, China (PRCH) has $121 billion and India $57 billion. Russia
has the least maturing, or $13 billion.
Rising borrowing costs forced Greece, Portugal and
Ireland to seek bailouts from the European Union and IMF. Italy’s 10- year
yields exceeded 7 percent last month, a level that preceded the request for aid
from those three nations.
Bad Combination
“The buyer base for peripheral Europe has
obviously shrunk at the same time that the supply coming to the market is
increasing, which is not a good combination,” said Michael Riddell, a
London-based fund manager at M&G Investments, which oversees about $323
billion.
The two biggest debtors, Japan and the U.S., have shown little trouble
attracting demand.
Japan benefits by having a surplus in its current account, which is the
broadest measure of trade and means that the nation doesn’t need to rely on
foreign investors to finance its budget deficits. The U.S. benefits from the
dollar’s role as the world’s primary reserve currency.
Japan’s 10-year bond yields, at less than 1 percent, are the second-lowest
in the world, after Switzerland, even though its debt is about twice the size
of its economy.
The U.S. attracted $3.04 for each dollar of the $2.135 trillion in notes
and bonds sold last year, the most since the government began releasing the
data in 1992. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30
billion of four-week bills it auctioned on Dec. 20 even though they pay zero
percent interest.
Tougher Year
With yields on 10-year Treasuries (USGG10YR) below 2 percent, an increasing number of
investors see little chance for U.S. bonds to repeat last year’s gains of 9.79
percent. The U.S pays an average interest rate of about 2.18 percent on its
outstanding debt, down from 2.51 percent in 2009, Bloomberg data show.
‘Given how well they have done, we don’t think they’re any longer a very
good hedge,” Eric Pellicciaro, head of global rates investment at New
York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets,
said in a Dec. 16 telephone interview.
The median estimate of 70 economists and strategists is for Treasury
10-year note yields to rise to 2.60 percent by year-end from 1.95 percent at
11:27 a.m. New York time. In Japan, the forecast for the nation’s benchmark
note yield is 1.35 percent, while it’s expected to rise to 2.50 percent in
Germany, from 1.90 percent today.
Central Banks
Central banks are bolstering demand by either keeping interest rates at
record lows or reducing them, and by purchasing bonds in a policy know as
quantitative easing.
The Federal Reserve has said it will keep its target rate for overnight loans between
banks between zero and 0.25 percent through mid-2013, and is now selling $400
billion of its short- term Treasuries and reinvesting the proceeds into longer-term
government debt in a program traders dubbed Operation Twist.
The Bank of Japan has kept its key rate at or below 0.5 percent since 1995,
and expanded the asset-purchase program last year to 20 trillion yen ($260
billion). The Bank of England kept its
main rate at a record low 0.5 percent last month, and left its asset-buying
target at 275 billion pounds ($431 billion).
The European Central Bank reduced its main refinancing rate twice last quarter, to 1 percent
from 1.5 percent. It followed those moves by allotting 489 billion euros of
three-year loans to euro-region lenders. That exceeded the median estimate of
293 billion euros in a Bloomberg News survey of economists. The central bank
will offer a second three-year loan on Feb. 28.
‘Flush With Liquidity’
The money from the ECB may be used by banks to buy government bonds, according to
Fabrizio Fiorini, the chief investment officer at Aletti Gestielle SGR SpA in
Milan.
“The market is now flush with liquidity after measures taken by central
banks, particularly the ECB, and that’s great news for risky assets,” Fiorini
said in a telephone interview on Dec. 20. “The market will have no problem
taking down supply from countries like Spain and Italy in the first quarter. In
fact, they should be able to raise money at lower borrowing costs than what we
saw in recent months.”
Italy’s sale last week included 2.5 billion euros of 5 percent bonds due in
March 2022, which yielded 6.98 percent. That was down from 7.56 percent at an
auction Nov. 29. It sold 9 billion euros of bills on Dec. 28 at a rate of 3.251
percent, compared with 6.504 percent at the previous auction on Nov. 25.
‘Phony War’
Investors should be most worried about the period after the ECB’s second
three-year longer-term refinancing operation scheduled in February, according
to Ignis’s Thomson.
“The amount of liquidity that has been supplied by central banks, with more
to come from the ECB in February, suggests the first couple of months will be a
sort of phony war as far as the supply is concerned,” Thomson said.
The ECB has bought about 212 billion euros of government bonds since
starting a program in May 2010 to contain borrowing costs for Greece, Portugal
and Ireland. It began buying Spanish and Italian debt in August, according to
people familiar with the trades, who declined to be identified because they
weren’t authorized to speak publicly about the transactions.
“There’s a lot of talk that the ECB might have to give more direct support
to the governments,” Frances Hudson, who helps
manage about $242 billion as a global strategist at Standard Life Investments
in Edinburgh, said in a Dec. 22 telephone interview.
Following is a table of bond and bill redemptions and interest payments in
2012 for the Group of Seven countries, Brazil, China, India
and Russia, in dollars, using data calculated by Bloomberg as of Dec. 29:
Country 2012 Bond, Bill Redemptions ($) Coupon Payments Japan 3,000 billion 117 billion U.S. 2,783 billion 212 billion Italy 428 billion 72 billion France 367 billion 54 billion Germany 285 billion 45 billion Canada 221 billion 14 billion Brazil 169 billion 31 billion U.K. 165 billion 67 billion China 121 billion 41 billion India 57 billion 39 billion
Russia 13 billion 9 billion
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