Biggest month of bond supply to test markets as rate cut bets fade
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[May 30, 2024] By
Harry Robertson
LONDON (Reuters) - Global bond markets face the biggest amount of net
sovereign issuance so far this year in June, just as economic data
throws rate cuts into doubt, testing investors' so-far strong appetite
for the debt.
Net government bond supply is likely to rise to $340 billion for the
United States, euro zone countries and Britain, according to data from
lender BNP Paribas, as redemptions fall and central banks continue to
slash their holdings of the paper.
Although analysts expect markets to absorb the supply, it has the
potential to add to upward pressure on yields - which move inversely to
prices - and spook investors who were hoping that rate cuts would spur 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 grappling with strong economic data that
has caused traders to push back their bets on when central banks will
start cutting interest rates, is struggling to remain optimistic.
"We still have a lot of supply that needs to be absorbed," said Camille
de Courcel, head of G10 rates strategy for Europe at BNP Paribas, adding
that the euro zone will see its second highest month of net issuance so
far this year in June.
De Courcel said she is wary of buying longer-dated bonds in June, even
with the European Central Bank likely to lower interest rates, as
economies recover and supply is strong. "We are very mindful of the
risks that (yields) head higher as we go into June, especially in
Europe," she said.
Developed market governments are still borrowing large amounts as they
help their economies recover from the shocks of the COVID-19 pandemic
and the energy crisis sparked by Russia's invasion of Ukraine. Elections
in the United States and Britain, and for the European Union's
Parliament this year are adding to 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 allowing
$95 billion of government and mortgage-backed bonds to mature without
replacement each month, although that is set to slow down from June,
while the Bank of England is actively selling debt back to the market.
Investors have so far been eager to step in, with Britain receiving
record demand for an inflation-linked 30-year bond in March. Euro zone
countries have taken advantage of investor appetite to sell around 53%
of their debt for the year already, according to BNP Paribas, up from
45% this time last year.
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Federal Reserve Chair Jerome Powell holds a press conference
following the U.S. central bank's two-day policy meeting in
Washington, U.S., May 1, 2024. REUTERS/Kevin Lamarque/File Photo
"It has been digested insanely well, I would say, and that's to some
extent a bit surprising," said Michael Weidner, co-head of global
fixed income at Lazard Asset Management. He said many investors are
now attracted by higher yields after years of near zero returns, as
well as the likelihood of a rally in prices when central banks
kick-off their easing cycles.
June's elevated net supply is driven largely by a fall in maturing
bonds so investors, without the return of principal sums, have less
cash to reinvest in the primary market.
"That (mismatch) has never proven to be a huge issue," Weidner said.
"Banks...will take on, I believe, a substantial part of the gross
supply, being well aware of the fact that redemptions in the
following month will be higher, and they will be able to set up to
sell the book."
Investors' concerns about government borrowing tend to focus on the
longer-term rise in debt levels around the world, particularly in
the United States with the country's Treasury bonds considered one
of the world's safest assets.
The Congressional Budget Office said in a March report it expects
U.S. public debt to rise to 166% of GDP in 2054 from 99% this year.
"At some point, if we continue to see mounting deficits around the
globe at this level, then you should see investors demand a higher
risk premium to lend, especially for longer maturities," said
Michael Goosay, global head of fixed income at Principal Asset
Management.
"But in the near term, between central banks continuing to be the
buyer of last resort to some degree as well as the concerns of a
slowdown in growth and the need for central banks to ease
policy...that is driving the way that investors are positioning."
(Reporting by Harry Robertson; Editing by Kirsten Donovan)
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