While a certain sect of economists are lamenting the exponential increase in debt issued by an assortment of sovereign entities [and corporate bond issuers] within the context of a feared liquidity crisis if and when rates turn higher and institutional investors might run for the exits at the same time, MarketsMuse.com fixed income fix profiles global macro observations from Barry Ritholtz, the Bloomberg View columnist who writes about finance, the economy and the business world. Barry started the Big Picture blog in 2003 and is the founder of Ritholtz Wealth Management, an asset management and financial planning firm. Below is excerpt from Barry’s Mar 17 Bloomberg View article”The Worldwide Deficit of High-Quality Debt”
Expectations of economists and pundits notwithstanding, interest rates are falling around the world. Despite the end of quantitative easing in the U.S., and the possibility that the Federal Reserve will raise rates later this year, the long-feared economy-killing yield spike has yet to appear.
During the past few months, I have been discussing this with participants in the bond markets and getting a variety of responses. The one I come back to is surprisingly simple: Increased demand for quality long-term bonds combined with a limited supply has created a shortage of investment-grade securities.
As soon as you wrap your head around this, the first thing you encounter is the massive amount of debt the world over. Most of it is pretty low quality. If you are talking about high-quality debt, it isn’t going to be Greek or Russian or Argentinian debt; it isn’t even going to be Italian or French debt. It will be bonds issued by the U.S., Germany or Japan. That’s pretty much it for the high quality, sovereign bonds offered in any real size.
We can certainly find high-quality paper from Switzerland or Singapore or Sweden or even Taiwan (Norway is rated AAA, but it runs a surplus). Throw in Canada, Finland, Australia and the Netherlands and you have pretty much covered the universe of other A-rated countries, though none of them issues a whole lot of debt. Hence, although there may be no shortage of quality issuers, there seems to be a shortage of quality sovereign securities. I understand that might be hard to imagine given all of the debt worldwide, but the key word is quality. There’s lots and lots of bad paper, but surprisingly limited quantities of good paper.
Before you collectively start ranting about QE, we already know that the Fed has been a buyer of U.S. debt for more than five years. Not too long ago, the Bank of Japan joined in with its version of QE. Now, the European Central Bank is in the game as well. But central-bank buying doesn’t account for the shortage of debt that explains the negative yields we see in parts of Europe.
My back-of-the-envelope calculation (that’s the technical term for a fair guess) is that demand exceeds supply by as much as $1 trillion to $2 trillion a year. That is what has been forcing bond prices higher, and driving negative yields.
There are other forces that account for the dearth of debt. The three biggest are:
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