Bonds to get by with little help from central banks

This article is more than 12 months old


The rebound of global growth is sounding the death knell for easy money, so debt markets should see the backs of central banks this year.

The colossal sums that central banks injected into the financial systems to ward off economic cataclysm went primarily into the debt markets, which will have the biggest adjustment to make as part of the so-called normalisation of monetary policy by central banks.

As central banks slow their purchases of debt and reduce their holdings, the interest rates that governments and companies pay to borrow money are expected to climb higher.

While everyone expects borrowing costs to rise, the question is if it will happen smoothly. Any disruptions in the credit markets can have a severe impact on the overall economy.

In Europe, where the European Central Bank is set to continue buying €30 billion (S$48 billion) of assets each month until September, there is a note of optimism in the air.

"We don't see a strong break with last year," said Mr Felix Orsini, who handles government debt issues for Societe Generale's commercial and investment bank. "There is a deep resilience of the market, and there is still plenty of appetite for risk and a large margin for manoeuvre before the level of dissuasive rates."

HSBC's head of European public sector Frederic Gabizon shares that view. He foresees "a moderate increase in rates paid by companies and European states this year".


Most bond market experts see the greatest risk as sharp re-adjustment of the market where interest rates spike higher, as in the 2013 "taper tantrum" when investors panicked in reaction to news that the US Federal Reserve would reduce, or taper, its purchase of bonds, thus sending rates of return surging higher.

With the US Fed taking the lead in the normalisation, cutting its holdings of bonds along with raising interest rates, investors and experts are looking at how borrowing costs evolve.

There have been a few voices of caution, such as S&P Global Ratings and the International Monetary Fund's chief economist Maurice Obstfeld.

"There is a lot debt," he said. "If there were a sudden rise in US interest rates, that could put a lot of debtors under stress."

But Mr Rene Defossez, a debt analyst at French investment bank Natixis, said "central banks aren't taking any risks, they are normalising their policies on tiptoes, and with inflation still extremely weak, they don't have any reasons to rush".

For Mr Eric Vanraes, head of fixed income investments at the Swiss-based Sturdza Banking Group, what is most likely to change is volatility.

"After years where the monetary programmes drowned out volatility on all the markets, investors will have to get used again to erratic movements", in amplitude and duration.- AFP