Sat, September 25, 2021


US bond sales could spell troubles

FOR YEARS, low interest rates have been a boon for global economy.



They encourage consumer spending as well as business expansion. They also drive up asset prices and, in turn, create newfound wealth for many investors around the world. Ultra-low interest rates and relentless liquidity injection from major central banks have kept global stock markets on the steady course upward for the past several years. Volatility has been kept unusually low, on a premise that central banks stood ready to stimulate economy if anything bad were to happen. 
But as strong economic momentum lessens the need for stimulus, central banks will gradually raise interest rates and wind down their bond buying (QE) programmes . 
The European Central Bank (ECB) has already announced the plan to reduce the monthly bond purchases to 15 billion euro from 30 billion euro after September 2018 and completely terminate QE by the end of this year.
The US Federal Reserves (Fed) is also buying fewer bonds to allow its balance sheet to shrink.
Just as central banks are buying less, the US government is planning to sell more. The US Treasury department is boosting sales of government bonds to help finance a widening budget gap due tax cuts and spending increase. The Treasury Department predicted the US government’s borrowing needs in the second half of this year will jump to the most since the financial crisis a decade ago. The Congressional Budget Office forecasts the US budget deficit will jump from around $500 billion in 2016 to $900 billion this year and will continue climbing to exceed a trillion mark in 2019.
The falling demands from central banks coupled with record bond sales by US government could create tremendous stress in financial markets. Interest rates could rise steeply as market struggles to absorb additional bond supplies. Liquidity conditions could also deteriorate as massive bond sales competes for market funding. We recommend investors to keep an eye on US Treasury bond yields as a sign of stress in financial markets. Our earning yield gap model suggests that stock market could come under pressure if US 10-year Treasury bond yield overshoots 3.3 per cent. 

KOMSORN PRAKOBPHOL is Head of Strategy at TISCO Economic Strategy Unit. He can be reached via or [email protected]

Published : August 01, 2018