Bond supply set to turn positive as central banks eye end of easy money

LONDON: A scaling back of central bank cash injections into the world economy could lead next year to the first glut in sovereign debt issuance from major economies in four years.

It would also push up borrowing costs by creating a larger pool from which to buy.

The US Federal Reserve has said it will begin cutting its bond holdings this year and the European Central Bank is expected to start scaling back its 2.3 trillion euro bond-buying stimulus scheme next year, given a brighter economic backdrop.

It’s a prospect that means net sovereign bond issuance - after central bank purchases - from the United States, the eurozone and Japan could turn positive in 2018 for the first time since 2014.

Between them, the Fed, the ECB, the Bank of England and the Bank of Japan have snapped up almost US$15 trillion of bonds over the last eight years, roughly three-quarters of what the US economy is worth.

Because that buying has outstripped bond issuance by governments, net supply has been negative in the last few years, helping to anchor bond yields.

Calculations by asset manager Blackrock show net sovereign bond issuance for the United States, Japan and the eurozone - once reduced central bank purchases are taken into account - is turning positive.

Analysts said that even a slight reduction in the number of bonds the ECB buys would mean a lot more supply for the market to digest - a prospect that is not being factored into prices.

“If you get the ECB stepping away and you have the Fed reducing its balance sheet, around about the third quarter of next year, we’re going to see a flip where central bank balance sheets globally, on aggregate, start to reduce,” said Iain Stealey, co-manager of the JPMorgan Asset Management Global Bond Opportunities Fund.

“That will be the first time since we’ve seen that since the financial crisis.” - Reuters