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aws〖账号〗(www.2km.me)_Insight - A bond supply shock may be next for markets

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JPMorgan estimates central bank bond demand across the United States, Britain, Japan and the eurozone will drop by US$2 trillion (RM8.4 trillion) in 2022 following a US$1.7 trillion (RM7.16 trillion) reduction this year.

CENTRAL banks, the developed world’s most reliable group of bond buyers, could slash debt purchases next year by as much as US$2 trillion (RM8.4 trillion) across the four big advanced economies, implying a potentially hefty rise in many governments’ borrowing costs.

For years, but particularly since the Covid-19 pandemic erupted in March 2020, central banks have effectively backstopped government spending, mopping up a significant proportion of the debt hitting markets and preventing yields from rising too high.

But if central banks set a schedule for unwinding pandemic-era stimulus, a dearth of highly-rated bonds, especially in Europe, may turn into an excess.

JPMorgan estimates central bank bond demand across the United States, Britain, Japan and the eurozone will drop by US$2 trillion (RM8.4 trillion) in 2022 following a US$1.7 trillion (RM7.16 trillion) reduction this year.

It expects US, German and British 10-year yields to rise 75, 45 and 55 basis points, respectively, by end-2022, although it did not specify the impact of supply on bonds.

Globally, JPMorgan predicts central banks will lead a roughly US$3 trillion (RM12.6 trillion) drop in bond buying, translating into an average yield rise of 20 to 25 basis points.

“I am not suggesting next year is going to be bond Armageddon – but you’ve got a period where inflation is still stubbornly high, central banks are behind the curve in terms of raising interest rates, and at the same time you’ve got large net supply,” said Craig Inches, head of rates and cash at Royal London Asset Management (RLAM).

“That’s quite a heady mix for bond markets.”

The US Federal Reserve (Fed) will end the phase-out of its US$120bil (RM505bil) monthly purchases in March. The Bank of England’s (BoE) £895bil (US$1.18 trillion or RM4.97 trillion) bond-buying scheme ends this month, while the European Central Bank’s (ECB) €1.85 trillion (US$2 trillion or RM8.7 trillion) Pandemic Emergency Purchase Programme (PEPP) will expire in March.

Central banks won’t vanish from markets. To compensate for withdrawing PEPP, the ECB will temporarily double existing monthly stimulus to €40bil (RM190bil), while the Fed and the BoE will continue ploughing proceeds from maturing bonds back into markets.

Overall though, the impact is negative.

Britain could be the market most affected. ING estimates that private investors will have to absorb a net £110bil (RM612bil) of gilts in 2022 versus £14bil (RM77.8bil) this year, given 2021’s BoE bond purchases of almost £170bil (RM945bil).

What’s more, the BoE plans to stop reinvesting proceeds of maturing debt once interest rates reach 0.5%, a level that’s possible by mid-2022. Once rates hit 1%, it may consider selling off the bonds it owns.

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