Govts face extra debt costs as stimulus dries up
August 19, 2013 Leave a comment
Updated: Monday August 19, 2013 MYT 6:51:22 AM
Govts face extra debt costs as stimulus dries up
PARIS: Governments face a rise in their borrowing costs due to the winding down of monetary stimulus programmes and as investors bet on central banks hiking interest rates sooner than promised. Moody’s Analytics warned last week that “US rates could rise as the Fed moves to slow its purchases of long-term debt, which in turn could push up the yields on European government bonds.”That has already begun.
The yield on the debt of the United States and top European countries, as well as emerging economies, has risen recently as investors bet that the US Federal Reserve could begin as soon as in September to lower the amount of monetary stimulus it injects into the economy.
The US$85bil per month that the Fed has ploughed into the US economy led to lower bond yields in the United States, as well in many other countries as easy money went abroad from the United States in search of somewhat higher risk and yields elsewhere.
But recently, investors have factored in the prospect of the easy money tap being slowly closed down. This has pushed up yields on US Treasury bonds, and has caused some of the money placed abroad to be withdrawn, pushing up sovereign bond yields elsewhere.
The rate of return for investors on 10-year US Treasuries rose to 2-year highs this past week, implying a more than 50% increase in US borrowing costs since the beginning of the year.
On Friday, 10-year Treasuries were trading at 2.812%, up from 2.689% at the beginning of the month and 1.828% at the beginning of the year.
Ten-year British gilts were at 2.704% Friday, up from 2.401% at the beginning of August and 1.990% at the beginning of the year.
At the height of the eurozone debt crisis, some eurozone money flowed into less risky bonds, such as French debt. But as the debt crisis eases, bond yields for the countries in trouble have fallen and there are signs that yields on the safe haven countries may rise, with French bonds being closely watched.
For Germany, the yield on 10-year Bunds was 1.881% on Friday, up from 1.667% at the beginning of the month and 1.442% at the beginning of 2013.
France’s 10-year bonds yielded 2.400% Friday, up from 2.223% at the beginning of August and 2.077% at the beginning of the year.
The drop in sovereign bond yields to exceptionally low levels, thanks to the ultra-low interest rates set by central banks and huge monetary stimulus programmes, have masked the debt problems the countries face. – AFP
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