EC The Looming Shortage In Government Bonds

Outlook for Supply  

In a recent report, Bank of America Merrill Lynch said that  "the world is running out of positive-yielding safe-haven bonds’’. The looming shortage has implications in many segments of the fixed income market. Every indication points to a worsening of the supply shortage of high quality bonds. In the US, the 2016 Federal deficit is expected to be lower than the previous year by some 25 percent. To finance this lower deficit, the Treasury has opted to issue more bills instead of bonds as a means of lowering interest costs.This combination will exacerbate the shortage situation and will most likely keep long rates down at these current levels.

In Europe, the ECB is running out of qualified government bonds to purchase in the wake of a growing segment of the market having gone deep into negative territory. It has had to resort to buying corporate bonds to satisfy its purchasing objectives. There is no sign that Euroland will ease up on its austerity program and we can expect a tight supply of new government issuance in 2016-17. Japan continues to wallow in deflation and the BoJ continues to be under pressure to step up its bond purchasing program, driving longer dated yields ever lower. From a supply perspective alone, we can expect that long term rates will be kept at these historic low levels.

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Doug Wakefield 3 years ago Contributor's comment

In March 2015, the JP Morgan annual stockholder report discussed the shrinking of Treasuries in ciruclation since 2007 even though the supply worldwide had expanded greatly. The evidence supported what you are talking about here. Central banks, sovereign wealth funds, etc, had been buying up US Treasuries and other Tier one assets (Basel III), while the supply at the dealer level had been shrinking dramatically. Your article only reinforces what I told my readers last year, and makes perfect sense. This is going to produce a huge shock to those holding heavy stock allocation with the mindset that higher stock prices mean MORE liquid assets, when development in US Treasuries since 2007 makes it clear this is not the case. Excellent article.

Gary Anderson 3 years ago Contributor's comment

Thank you for confirming what few believe, but is most likely true. And shortages could increase if policy is established to weaken price and boost yields. It is a diabolical bond first world we live in. Bonds as collateral are going to be in increasingly short supply if we are to believe people who are in a position to know.