عودة سلطة سوق السندات!

“Guardians of the Bond Market” is a term that emerged on Wall Street in the 1980s. Simply put, it refers to the ability of lending entities to hold governments accountable, by selling those governments' bonds or demanding a higher yield to purchase them. When does this happen? If they see a government expanding its spending and borrowing, or that its policies may lead to higher inflation. Here lies the power of the bond market. The government can decide the size of its spending and taxes, but it cannot always dictate the price that “funding entities” will require to finance it. The “Guardians of the Bonds” remained a significant force in the markets throughout the 1980s and 1990s. Rising yields were able to disrupt governments' financial plans and push them to reconsider their spending and deficit paths, but a change occurred after the global financial crisis in 2008.

During the global financial crisis of 2007-2008, the world economy entered an era of cheap money. In light of this, central banks lowered interest rates to unprecedented levels, launched quantitative easing programs, and became massive buyers of government bonds. As a result, governments of major economies were able to borrow at low costs for over a decade, to the extent that some government bonds traded at negative yields.

Then came the COVID-19 pandemic, which allowed the trend of low interest rates close to zero to continue. Government spending, deficits, and debt rose, but the bond markets absorbed a large part of that in an environment where interest rates remained attractive. From this perspective, it seemed for a while that governments had much more financial room than previously thought.

However, inflation rewrote the equation. With the wave of inflation that followed the pandemic, central banks were forced to raise interest rates, and then began to roll back some of the exceptional policies they had followed in previous years. Suddenly, the world found itself facing a massive legacy of debt that had accumulated during the era of cheap money, but now needed refinancing in a time when money had become more expensive.

The issue is not just how much governments have borrowed, but at what price they will refinance what they previously borrowed; this is perhaps the most significant problem facing debt markets today. The amount of sovereign debt outstanding for OECD countries is around $65 trillion, according to the Global Debt Report issued by the organization itself. A large portion of the outstanding bonds will mature in the coming few years. The organization indicates that 80% of the borrowing by its member governments this year is going towards refinancing existing debts, not funding new spending. This means that a bond issued years ago in an environment of extremely low interest rates may mature today, forcing the government to replace it with a new bond at a higher yield. With this process repeating, high interest rates gradually transfer to the public budget through an increased debt service bill. Here, the “Guardians of the Bond Market” began to reappear on the scene.

The challenge is that the demand for borrowing will not be low in the coming years. Governments need financing for defense, infrastructure, energy transition, and aging population costs, while companies need to finance massive investments in technology, data centers, and energy. Here, one of the oldest rules of economics comes back to the forefront: there is no financing without a price. So what is happening is more than just a temporary movement in bond prices.