James Trescothick

With more than 20 years of experience in financial service industry, James is our Senior Global Strategist and the co-producer and presenter of easyMarkets educational videos. When he is not working on educational programs or preparing webinars, you can find him with the easyMarkets team giving seminars around the world.

The level of debt among the biggest economies in the world requiring refinancing by governments for 2016 has remained essentially the same as last year. This comes as countries have been successful in reducing budget deficits to around one-third of their highest levels during the global financial crisis.

The total value of the notes, bonds and bills of the Group of Seven along with that of Brazil, Russia, India and China has reached $7.1 trillion, which is higher than the $7 trillion last year. But, this value is lower compared to 2012, which reached $7.6 trillion. Information obtained by Bloomberg shows that redemptions in Canada, Germany, Japan and Italy are expected to decrease, while redemptions in China, the United Kingdom and the United States are expected to increase.

Ever since Bloomberg started gathering information in 2012, a gradual decline in the amount of maturing debt was noted. The bond market may benefit from this decline as interest rates are gradually increased by the US Federal Reserve. This situation may result to record lows for yields. Economists expect budget deficits to decrease for the seventh consecutive year in 2016. This comes as the maturity of outstanding debts has been extended by different governments, which may cause a reduction in the amount of spending meant to deal with the international financial crisis.

Mohit Kumar, rates strategy head at the corporate and investment-banking unit of Credit Agricole SA in London, said a good number of countries are expected to practice fiscal discipline. Financial expansion was observed during the financial crisis mainly to sustain development and allow governments to remove the burden of liabilities from the private sector. However, these effects are starting to ebb.

Increase in the Number of Migrants

Even as governments are not compelled to increase borrowings due to the decline, it does not automatically result to a decline in issuances since this is essentially determined by overall funding requirements.  This year Germany is aiming to increase bill and bond sales to 203 billion Euros or $221 billion, which is considerably higher than the 175 billion Euros in 2015. This is mainly intended to raise funds for the cost of the sudden surge in the number of migrants.

Information obtained by Bloomberg shows that Brazil and Russia are expected to have the biggest proportional reduction in debt redemption with securities, which went down by 26 percent and 38 percent, respectively. Debt requiring refinancing by the G7 and the BRIC nations will reach $7.8 trillion for this year, which is similar to the amount in 2015.

The Bank of America Merrill Lynch indexes show that Investors received a 1.2 percent gain in government bonds for 2015. In comparison, the gain for 2014 was at 8.4 percent while the last five years saw an average return of 4.4 percent. Yields normally move in the opposite direction as the movement of prices. With the weakening effects of recession, yields have started to increase. This also resulted to a decline in the demand for securities as safe havens even as four rate increases are expected by the US central bank within the year.

Additional Compensation

The median forecast of sixty-five analysts in a survey conducted by Bloomberg showed an increase in the yields of 10-year US Treasury bonds. This increase may reach 2.75 percent by the end of the year, which is higher than the 2.21 percent at the start of the same year in New York.

In this situation, additional compensation may be required by investors so they will continue to hold on to bonds. This includes Japan and Germany where their respective central banks are keeping yields at low levels while expanding the supply of money through the purchase of debt. The Global Government Index of Bank of America Merrill Lynch indicates that the average sovereign yield will increase to 1.1 percent. This figure is higher than the record-low of 0.82 percent in January 2015.

David Schnautz, Commerzbank AG fixed-income strategist in London, said as an increase in yields is noted, other bonds will benefit from the tightening by the Fed. Schnautz added that an offsetting factor will result from the lower borrowing requirements. Existing structural demand will also continue to exist, which will put limitations on bond yields.

The $13.1 trillion in marketable debt obligations makes the United States the biggest debtor country in the world. Information obtained by Bloomberg show that the total government securities set to come due is expected to increase by 14 percent. The total amount is expected to reach $3.5 billion. China has to deal with the largest percentage increase in refinancing for this year as it went up by 41 percent at $254 billion.

Rabobank International said the demand for government bonds is highlighted by the decline in bond redemptions among the leading economies in the world. The situation is further underscored by quantitative easing programs and passive inflation. This comes as yields are expected to increase due to higher US interest rates.

Fixed payments offered by bonds will become appealing as inflation slows down. An increase of 0.5 percent in consumer prices in developed countries was noted in 2015 by economists who took part in a survey conducted by Bloomberg. In comparison, the increase in consumer prices in 2008 reached 3.5 percent.

Economists expect budget deficits among developed countries to go down by an average of 2.4 percent of their respective gross domestic products for 2016. In comparison, budget deficits for 2015 and 2009 were at 2.6 percent and 7.2 percent, respectively.

Rabobank rates strategist Lyn Graham-Taylor said government bonds may benefit from the economic situation and policies established for 2016. Graham-Taylor added they are bullish about the situation.

The following table shows the projected bill and bond redemptions along with interest payments among G7 and BRIC countries for 2016 based on information obtained by Bloomberg as of December 31. The figures are in billions of dollars.




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