Please subscribe or upgrade your membership. To continue reading this article please sign in below or subscribe to our site.
SubscribeGovernments across the world will be looking to sell the largest amount of net debt on record in 2023 providing increasing opportunities for investors, attendees to the latest Room151 Monthly Online Treasury Briefing (MOTB) have been told.
Gillian Jago, senior trader for Ardea Investment Management, said that governments were responding to the cost-of-living crisis, the war in Ukraine and the lasting effects of Covid-19 through expansionary fiscal policies including energy subsidies, tax reliefs and income support.
“Whilst some of this financing is going to come through taxation, the bulk of it will fall onto bond markets, and come through net debt issuance,” she said.
There are a lot of bonds coming to the market this year. At this party, the buffet is overflowing with choice.
Bond party
Jago used the metaphor of a “bond party”, as governments sell more debt and central banks reduce their balance sheets through quantitative tightening.
“There are a lot of bonds coming to the market this year. At this party, the buffet is overflowing with choice,” she said. “The good news is the buffet has different cuisines with multiple dishes, and enough to go around for everyone.”
Room151 Conferences – Treasury, Pensions, Housing, Strategic Finance
The annual net cash supply across the G3 – the US, Europe and the UK – is expected to reach a record level of $2.4trn in 2023 according to Goldman Sachs.
Jago said that there are “plenty of bonds at good prices” in this buyers’ market for new debt. However, the situation for existing debt is very different.
While it’s great if you’re looking to add new debt, it’s not so good for the ones you already hold.
Capital loss
She gave the example of the German government’s announcement in December 2022 of its funding requirements for this year. The figure of €300bn was significantly higher than the €240bn expected, and let to a sharp increase in yields on ten-year German bonds.
“There was an immediate capital loss for investors who already held those bonds. While it’s great if you’re looking to add new debt, it’s not so good for the ones you already hold.”
Volatility in the bond market was also seen, of course, in the UK following the large increases in government borrowing announced in the ill-fated mini-budget of September 2022. The consequent spike in bond yields led to collateral calls on pension funds that use liability-driven investment (LDI) strategies.
“I’m not saying that we are going to get a repeat of the LDI crisis in the next month or two. But as markets are continually asked to fund these debts, it is not unreasonable to assume that we could get these very volatile moves when the market just reaches a saturation point.”
Other presentations at the MOTB session were from Nick Edwardson, senior investment specialist at Aegon Asset Management, and Amy Browne, stewardship lead at CCLA Investment Management. Edwardson provided the macro-economic and markets update, while Browne discussed CCLA’s corporate mental health benchmark.
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Room151 LinkedIn Community
Join here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
