Surging Debt Supply to Boost Global Yields, Goldman Sachs Says

(Bloomberg) — Increased government borrowing and central bank efforts to reduce balance sheets will boost debt yields, according to Goldman Sachs Group. 

An analysis of major developed bond markets shows that, outside Japan, each increase of one percentage point in the public debt to GDP ratio is likely to boost medium-term yields by at least two basis points this decade, Bill Zu, vice president for interest-rates strategy at Goldman Sachs, wrote in a report Wednesday. 

The debt ratio excludes any government bonds that are held by the central bank.

The concern that investors may again start fretting about an overabundance of supply — a key driver for the rout that hammered bonds in September and October — haunted markets even as debt rallied at the start of 2024. With most central banks no longer hoovering up bonds to bolster economic growth, governments may find higher yields are needed to entice more investors.

“Fiscal deficits and public debt issuance among major developed economies are set to remain elevated this year and beyond,” Zu wrote. A likely scenario is that “US medium-term rates will be lifted by about 55 to 65 basis points over the next 10 years.” 

The estimate is based on expectations that the sensitivity of yields to debt supply will rise in coming years as global savings rates decline. Currently each percentage point increase in debt has added 1 to 1.5 basis points to yields, but that’s likely to revert to the 2 to 2.5 basis-point impact seen in the mid-2000s, the note added. 

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