Rich nations’ debt issuance to reach record high
According to the OECD, the issuance of debt by governments in affluent nations is projected to reach unprecedented levels. According to the Organization for Economic Cooperation and Development, governments in affluent nations are poised to issue an unprecedented $17 trillion in bonds this year, driven by the escalating costs associated with refinancing existing debts, which are exerting upward pressure on their interest expenditures. The increase in bond issuance occurs concurrently with numerous central banks divesting the bonds they accumulated in the aftermath of the global financial crisis, a period characterized by their efforts to elevate inflation towards their targets rather than suppress it.
Households and foreign investors have filled the void, yet the OECD cautioned that these purchasers are increasingly inclined to seek elevated yields amid rising geopolitical tensions and trade uncertainties. The OECD’s annual report on debt issuance indicates that affluent nations are expected to maintain access to bond markets without significant challenges in attracting buyers at manageable interest rates. However, this scenario may not extend to governments in less wealthy countries or certain corporations. “The sustained elevation of long-term interest rates in primary markets presents significant challenges for corporate and emerging market borrowers specifically,” stated Carmine Di Noia, director for financial and enterprise affairs at the Paris-based research organization.
The OECD projects that total bond issuance by its member governments increased to $16 trillion in 2024, up from $13 trillion in 2023, and anticipates further growth this year, significantly surpassing the volumes observed prior to the Covid-19 pandemic. Approximately 85% of the total issuance will be attributed to the governments of five nations: the United States, Japan, France, Italy, and the United Kingdom, with the largest economy in the world representing over two-thirds of the overall figure.
A significant portion of the bond issuance occurring in the current and forthcoming years will serve to refinance securities that were previously sold to investors prior to the increase in interest rates that ensued after the pandemic. The OECD reports that 45% of the bonds currently outstanding, issued by its member governments, are set to mature by 2027. The replacement bonds are expected to offer considerably higher interest rates. Consequently, governments are encountering an increasing financial obligation to manage interest payments, despite the fact that numerous central banks have reduced their benchmark rates in response to a decline in inflation. The OECD projected that government interest payments as a percentage of economic output increased to 3.3% in 2024, up from 3% in 2023, surpassing expenditures on defense.
The challenges encountered by governments in attracting buyers for their heightened debt issuance have been exacerbated by the bond sales initiated by central banks, which commenced a reduction of their holdings in an effort to mitigate the inflationary pressures that emerged post-pandemic. In OECD member countries, the proportion of domestic government bonds held by central banks decreased from 29% of total outstanding debt in 2021 to 19% in 2024. The transition by central banks from extensive government bond purchases to a strategy of portfolio contraction, characterized by the non-replacement of maturing issues, necessitates the identification of alternative buyers to accommodate an additional $3 trillion in 2024, alongside a comparable amount anticipated for this year. In contrast, during the period from 2015 to 2019, the OECD found that entities other than central banks did not collectively augment their holdings of government bonds.
With central banks scaling back their involvement, households have increased their purchasing activity, representing 11% of outstanding debt in 2024, a rise from 5% in 2021. Concurrently, foreign investors have raised their stake to 34%, up from 29% during the same timeframe, according to OECD data. Nonetheless, the acquisition of government bonds by foreign entities could face interruptions due to escalating tensions between the leading global economies concerning trade and security issues. The OECD cautioned that the presence of adequately substantial and enduring foreign demand is contingent upon the magnitude and operation of international financial flows. “Nonetheless, geopolitical tensions and trade uncertainties have the potential to induce swift shifts in risk aversion, which could subsequently disrupt specific international portfolio flows.”
