Developments in sovereign bond markets through the pandemic

By Andreas Charalambous and Omiros Pissarides

Within the aftermath of the 2008 monetary disaster, quite a few analysts concluded that bond yields from nations with diametrically opposed financial efficiency and insurance policies had been allowed to converge dangerously. For now, we appear to be experiencing the same state of affairs.

Particularly, the extended interval of low rates of interest, mixed with the plentiful liquidity offered by central banks and the expansionary fiscal insurance policies of governments in response to the pandemic, have eroded authorities bond yields. In consequence, historically sturdy economies like Germany borrow at damaging rates of interest, whereas even nations with long-standing structural issues get new debt at notably favorable rates of interest. Examples embody China, which for the primary time issued a sovereign bond carrying a damaging rate of interest on the finish of 2020, in addition to Turkey, which, regardless of its unfavorable financial scenario, managed to situation a five-year bond. in simply two weeks. with an rate of interest of 5.125 p.c.

Though considerations a few resurgence of inflation are intensifying, indicators reflecting long-term value expectations stay broadly steady, indicating the market view that rates of interest will likely be contained at low ranges. traditionally low for the foreseeable future. Particularly in Europe, the evolution of inflation doesn’t appear to fret the ECB, which didn’t differentiate its quantitative easing technique. In the US, inflation fears are extra pronounced, pointing to an rate of interest hike in 2023.

Numerous issues can come up.

First, the general public debt has reached very excessive ranges. Whereas most analysts acknowledge the necessity to implement expansionary insurance policies through the pandemic interval, it needs to be remembered that loans finally have to be managed or refinanced with, in all probability, dearer future loans.

Second, the empirical proof unequivocally signifies that extreme liquidity promotes elevated enterprise and / or funding threat, thus creating the circumstances for “bubbles” in the actual property market, the inventory market and different property reminiscent of cryptocurrencies.

Third, the extended interval of low rates of interest limits the power of banks to generate income and worth for his or her shareholders, notably throughout a interval of intensifying regulatory and capital necessities and restricted movement of recent loans into the long run. as a result of pandemic.

In conclusion, the speedy and decisive response to the pandemic contained the event of a extra intense disaster. On the similar time, nonetheless, it has created an surroundings that permits bond markets to supply a disproportionate benefit to economically weak states.

That is why every nation, together with Cyprus whose sovereign debt reaches 120% of GDP, should develop a practical adjustment technique so as to convey its public debt to a gradual downward pattern, whereas persevering with to help its fundamental pillars of progress.

Andreas Charalambous is an economist and former director of the Ministry of Finance. Omiros Pissarides is the Managing Director of PricewaterhouseCoopers Funding Providers

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