Money & Banking

A wall of bond supply to fight virus is roiling debt markets

Bloomberg March 20 | Updated on March 20, 2020

Along with all the other problems rattling markets, fixed-income traders are now grappling with a big question: Will investors be able to absorb the massive supply of government bonds that will be issued without sending interest rates soaring?

As governments around the world roll out measures to mitigate economic damage of the coronavirus, bond yields have been climbing. That raised the spectre that the massive upcoming supply of sovereign debt and inflationary influences from the stimulus will trigger more losses in bonds as investors refuse to buy until rates rise significantly.

However, decoding what is pushing rates up over the past week is not as simple as it sounds. While Treasury yields had their biggest single-day increase since 1982 on Tuesday after President Donald Trump endorsed sending checks to every US household, a lack of liquidity may at least be partly to blame.

Meanwhile, State Street Corp, JPMorgan Chase & Co and Vanguard Group are among those who reckon central banks’ resolve to buy enormous amounts of bonds through quantitative easing will limit the increase in yields.

“I actually think the prospect of fiscal stimulus on a wide scale wouldnt rattle markets as much as people fear,” said Tim Graff, head of macro strategy at State Street. “We have only retraced a one-month yield move. There’s a lot to be done to temper any vigilantism in the market by the central bank saying well just buy them.”

One thing is certain: A massive supply of new government debt is on the way. Politicians in capitals from Washington to Canberra this week are shaking off fiscal restraint and vowing to fight the virus’ economic fallout with a blitz of fiscal measures. Even Berlin, where fiscal prudence is an obsession, is getting in on the act. With the tally of pledges approaching $2 trillion worldwide and rising, much of the funding shortfall will need to be financed with public debt.

The still-unquantifiable economic damage from the virus has caused a violent repricing in government bonds. Ten-year Treasury yields went from a 2020 high of 1.94 per cent in January to a record low of 0.31 per cent on March 9.

Published on March 20, 2020

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