Global bond markets face the biggest amount of net sovereign issuance so far this year in June, just as economic data throws rate cuts into doubt, testing investors’ so-far strong appetite for the debt.
A pair of weak U.S. Treasury auctions on Tuesday may have been an early sign that the market, already grappling with strong economic data that has caused traders to push back their bets on when central banks will start cutting interest rates, is struggling to remain optimistic. Developed market governments are still borrowing large amounts as they help their economies recover from the shocks of the COVID-19 pandemic and the energy crisis sparked by Russia’s invasion of Ukraine. Elections in the United States and Britain, and for the European Union’s Parliament this year are adding to the pressure to keep spending.
“It has been digested insanely well, I would say, and that’s to some extent a bit surprising,” said Michael Weidner, co-head of global fixed income at Lazard Asset Management. He said many investors are now attracted by higher yields after years of near zero returns, as well as the likelihood of a rally in prices when central banks kick-off their easing cycles.
Investors’ concerns about government borrowing tend to focus on the longer-term rise in debt levels around the world, particularly in the United States with the country’s Treasury bonds considered one of the world’s safest assets.