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Last week, Satori Insights’ Matt King wrote a great column in the main paper about why the 30-year bond massacre that caused such uncertainty is not actually basic and primarily technical.
After all, if this is about inflation, you’d expect it to show up in break-even inflation rates. If it’s a Yuge-Supply problem, certainly it certainly appears in other tenors on the yield curve where the country issues more debt. And if it was truly fearing the credibility of sovereignty, it makes no sense that pain is overwhelmingly focused on the 30-year section of the curve.
That said, many countries undoubtedly face some very troublesome questions when it comes to debt burdens. A recent Goldman Sachs report puts some numbers into these concerns, raising questions about some of the proposed palliativeism.
The main thing to remember is that despite interest rates fall, the Federal Reserve is expected to relax policies again later this week, so it doesn’t mean that government debt services costs are also declining either. In fact, they will likely continue to rise for years to come.
Many countries took advantage of the low era to issue longer term bonds and extended the “weighted average maturity” (WAM) of sovereign obligations.
This means that the cost of serving the increased debt pile remains significantly lower despite rising interest rates. But ultimately, all bonds sold when the fees were placed on the floor and bond yields were hit hard will have to be refinanced at a higher cost over the next few years. As Goldman’s economist says:
While governments’ own forecasts generally project deficits to improve in many economies, the long timetables for implementation, and the track record of predicting slips and deficits since the pandemic suggest that they are a durable feature of macro landscapes over the coming years. This means further future pressure on government budgets via interest costs, as market interest rates are far above the current average interest costs.
In countries with low WAM, especially in the US, this is already starting to bite, but it will become a growing problem almost everywhere.
Goldman Sachs has examined the markets by embedding government deficit forecasts, debt maturity and interest rate forecasts, and found that Italy, the US, Japan and France are seeing the biggest increases in debt service costs over the next five years.
One commonly offered solution is to issue shorter term bonds with lower yields.
For example, the US pays 4.6% to issue 30-year bonds, but about 4% in 10-year paper and 3.5% in 2-year memos. In the UK, comparable yields are 5.5%, 4.6%, and less than 4%. In France, it is 4.3%, 3.5%, and 2.1%.
The “yield curve” of bond maturity is not particularly steep at this point, but selling more short-term bonds could save most countries some money.
exclude. . . Some countries have already cut WAMs to reduce interest costs. And those who have not reduced the average duration of their bond issuance programs usually have a higher WAM, so it takes longer to affect the shift in debt issuance.
In fact, outside of Japan, this is a very special case, but the profits you get from the substantial two-year reductions of weighted average maturity are negligible (and not really that great in Japan either).
Goldman said that while massive cuts in central bank rates play a more role, it is likely that a recession will be needed for tax rates to drop aggressively, which is not good for tax revenue. So, investment bank economists will end things with funny notes instead.
Reducing WAM by one year is worth 3bp. The front-end rate reduction is worth 19bp. In contrast, reducing the deficit by 1 PP is worth 13 bp, without affecting the interest rate curve. This is an effect that builds over time as it affects debt stock reductions.
Here we are to reduce spending, broad deficits and steeper curves stay. Our work suggests that pressures on government budgets are unlikely to be resolved quickly.
lol. “Reducing spending.”
