It’s anybody guess which way the US$100 trillion bond market will go
‘The prospects for global bonds are likely to hinge on the actions of the European Central Bank’
For a sign of the extent to which conditions in global debt markets remain favourable, look no further than Greece’s sale of a five-year bond earlier this week.
On Tuesday, Greece, which labours under the heaviest debt burden in Europe as a share of GDP, returned to the international bond markets for the first time since 2014 with a US$3 billion sale of 5-year paper at a yield of just 4.6 per cent, a far cry from the punitive level of 35 per cent in 2015 when it looked like Greece was about to crash out of the eurozone.
This is the latest example of the remarkably benign conditions in debt markets over the past several years in the face of a rise in interest rates in the US and, more recently, signs that other leading central banks, in particular the European Central Bank, are preparing to edge away from the ultra-loose monetary policies that have sustained a 30-year-long rally in bonds.
As the Bank for International Settlements (BIS), the so-called central bankers’ bank, noted in its annual report published last month, monetary “policy normalisation has never been a question of “if” but rather of “when, how fast and to what level”.” The BIS says the world’s major central banks face an acute dilemma: “there is a risk of acting too early and too rapidly”, but also “a risk of acting too late and too gradually.”
It is the uncertainty surrounding the removal of monetary stimulus - particularly the consequences for the prices of government and corporate debt in both developed and developing economies which have been, to varying degrees, distorted by aggressive programmes of quantitative easing (QE) - that is at the heart of a fierce debate among international investors over the outlook for the nearly US$100 trillion global bond market.