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Rich countries’ borrowing is set to hit a record high this year as they are forced to refinance debt at higher rates, the OECD has said, putting a squeeze on many governments’ spending plans.
Debt issuance across 38 industrialised countries will rise 12 per cent to $15.8tn this year, according a report published on Thursday by the Paris-based organisation. The total overtakes a previous peak reached in 2020 when governments were scrambling to support economies at the height of the coronavirus pandemic.
The increase in issuance is largely due to a surge in bonds that need to be refinanced. Higher borrowing costs are set to push governments’ interest expenses across member countries up from 2.9 per cent of GDP last year to 3.4 per cent in 2026, according to the OECD’s estimates, adding pressure to public finances.
Mathias Cormann, OECD secretary-general, said “a new macroeconomic landscape of higher inflation and more restrictive monetary policies is transforming bond markets globally . . . this has profound implications for government spending and financial stability at a time of renewed financing needs”.
Concerns around governments’ borrowing plans have grown as investors have scaled back forecasts for interest rate cuts on both sides of the Atlantic this year. Having priced in at least six 0.25 percentage point cuts for both the Federal Reserve and the European Central Bank in 2024 at the start of this year, traders are now betting on only three or four cuts for each.
So far a glut of bond issuance this year has been easily absorbed by markets. But Robert Tipp, head of global bonds at PGIM Fixed Income, warned that if growth and inflation accelerate in the US — home to half of total OECD sovereign debt — there will probably be “at least a mini replay” of last autumn. In seven weeks benchmark Treasury yields rose from 4.1 per cent to hit 5 per cent by late October, despite the Fed keeping interest rates steady over the period.
“Commitments in the run-up to the election to boost fiscal stimulus and wage a trade war could create similar bouts of volatility, higher rates and wider credit spreads,” he said.
Total OECD sovereign debt will rise 4 per cent this year to $56tn, according to the report. The ratio of sovereign debt to GDP is expected to rise 1 percentage point to 84 per cent, having fallen or flatlined in the three years following a pandemic-induced peak in 2020.
While OECD government bond sales, after stripping out the impact of refinancing, are expected to be slightly lower than last year at $3.2tn, according to the report, they remain much higher than an average of under $2tn in the decade before the pandemic.
On top of governments’ elevated borrowing needs, central banks, which own about a third of OECD country sovereign debt, have started gradually selling down their holdings. That is set to leave investors with much greater levels of debt to absorb and put further pressure on yields.
“Much of the extra debt issuance during the pandemic was absorbed by central banks but now they are gradually withdrawing and we think this could add to existing market pressures,” said Carmine Di Noia, OECD director for financial and enterprise affairs. “Policymakers need to be very careful in managing this environment.”
The largest four central banks that engage in so-called quantitative tightening — the Fed, ECB, Bank of England and Bank of Canada — reduced their government security holdings from $11.5tn in 2021 to $10tn in 2023. The OECD said a further $1tn decrease was projected for 2024.
“As QT progresses, it remains unclear which investors will absorb the additional supply of government bonds,” the report said, adding that more price-sensitive investors “could put upward pressure on yields”.
