Government debt markets and the return of the bond vigilante
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Opinion

Government debt markets and the return of the bond vigilante

Banks are starting to assess the need to risk weight sovereign debt holdings.

This year is set to be a big one for government bond markets. Both in Europe and the US, governments are forecast to increase their net issuance of debt by as much as 40% in 2010 as they attempt to plug holes in their ballooning deficits. At the same time, in what could look like an attempt at brinkmanship, some of the world’s biggest bond managers say they’re cutting their exposure to US and UK government debt.

Bond funds such Pimco, the world’s largest, with almost a trillion dollars of assets under management, argue that record levels of issuance coinciding with the phasing out of central bank sponsored bond-buyback schemes will result in a rise in government bond yields. As a result they say they are cutting their exposure to UK and US debt. Other bond managers such as BlackRock, Barings Asset Management and Standard Life Investments publicly share a similar view. So does this mean a buyers’ strike and the return of the bond vigilantes?

The rise in government bond yields late last year would suggest so. Yields on 10-year Treasuries have spiked since the end of November from about 3.2% to 3.8%

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