What Goes Up, Must … What?

by | Jan 15, 2024 | Risk Report | 0 comments

Everyone knows that January is the time for sales. The market for government debt is no different. Come the new year, and countries around the world are looking to fund their budgets, which usually means that you can snag a good deal on treasury bonds.

And in 2024 the everything-must-go could turn out extra special though not necessarily in a good way.

The pandemic had many governments worried about an economic shutdown and therefore did what governments do; they skyrocketed public spending to keep the wheels turning. And that practice has somewhat continued in aid of a soft landing even though the savings accounts have been empty.

Said in another way: there is a lot of government debt out there and there is about to be more.

What is now different from the pandemic era—which makes it sound like it was a long time ago—is that central banks and governments are now consciously and compassionately decoupled. During COVID, central banks bought up the treasuries to help the economy grow. That kept interest rates low and bond prices high. Now they are slimming down their balance sheets, thus reversing that strategy.

“But wait a minute,” the keen reader will say, “won’t that raise interest rates and lower bond prices?”

The answer to that is a resounding maybe.

Despite what you were taught in Economics 101, higher supply does not automatically mean lower price. The higher-lower relationship is predicated on an unchanged demand which might or might not be the current case. In times of trouble, government bonds tend to act as a safe haven (and Mother Mary comes to me, thank you Beatles!)

Also, it’s not like the Treasury only has one hammer in their toolbox. They could play around with the flavor of treasuries they sell, specifically the term, and use that to manipulate the slope rather than the level of the interest rate curve.

Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.