Latest news with #borrowingcosts
Telegraph
3 days ago
- Business
- Telegraph
Politicians got used to cheap money. Now they're paying the price
Almost without exception, governments in advanced economies face an uneasy combination of high public debt and growth rates that are far too slow to fund rising public spending without resorting to even more borrowing or further anti-growth tax increases. Set against these serious policy challenges, it is no wonder that the surge in government borrowing costs that followed the gas-related inflation spike in 2022 has become a major source of concern for financial markets. In the UK and the US, 10-year government borrowing costs – a key market benchmark – have fluctuated in the 4pc-5pc range since the start of the year. Whenever borrowing costs edge towards 5pc, genuine panic seems to take hold. The commonly held view is that higher benchmark interest rates are a temporary issue that will disappear once inflation is under control, or that they are mostly a symptom of fiscal sustainability worries and can be resolved with sufficient budget discipline. But this is wrong. I am not arguing that governments and central banks should not take serious measures to improve policy discipline. Quite the opposite – this matters more than ever. Instead, my point is that even if we achieved both monetary and fiscal sustainability across the advanced world, my guess is that interest rates would fall only slightly. Why? Because the global economic forces that pushed interest rates to rock-bottom levels for more than a decade after the global financial crisis have gone into reverse. First, the global balance of savings and investment has shifted to a state that more closely resembles the pre-2008 era. In the wake of the crisis, demand for borrowing in Western economies collapsed. Along with a global rush to safety and excess savings in places like China, Japan and Germany, lower interest rates were required to balance global saving and investment. But Western debt demand is less depressed today, and the global savings glut is shrinking. In turn, the interest rates that balance these markets have risen. Second, global trade is flowing less freely as trade barriers increase and the geopolitical order fragments. US isolationism, the war in Ukraine and trouble in the Middle East put upward pressure on goods prices and increase the threat of conflict-related commodity price shocks. These inflation fears are reflected in interest rates. Third, a decades-long global demographic tailwind has turned into a headwind that will only worsen over time. As societies age, labour shortages push up wage costs and structural inflationary pressures. Fourth, with the return of inflation and the rise in global interest rates, central banks have ended their massive purchases of government debt — or quantitative easing (QE). In some cases, including the UK, central banks have been actively selling off their government debt portfolios. During the financial crisis, the argument against bailing out institutions was that it would foster moral hazard. Banks, betting on future bailouts, would take on much more risk than they otherwise would if they had to bear responsibility for their decisions. This rationale was partly behind the tragic decision to allow Lehman Brothers to fail. But, in a strange twist of fate, it was governments themselves that fell prey to moral hazard. We knew back in 2008 that government debt was at risk of spiralling out of control and that excessive deficits needed to be curtailed. That is why the UK and US both embarked on belt-tightening once the recession ended, and why parts of peripheral Europe were forced to endure excruciating austerity. But after a while, those fears about fiscal sustainability faded as structural forces drove down government borrowing costs and QE tranquillised bond investors. By the time Covid hit in 2020 – when borrowing costs reached their nadir and governments had convinced themselves that inflation would never return, and that interest rates would stay low forever – they had no misgivings whatsoever about ramping up borrowing. A German economist named Rüdiger Dornbusch, who spent most of his career in the US, said: 'Crises take longer to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine.' This roughly captures the story of fiscal policy in advanced economies over the past two decades. After interest rates stayed low for much longer than anyone imagined, they normalised faster than anyone thought they could. The maths behind massive debt-financed green transitions, generous welfare states and rising defence spending – all while financing rising state pension costs and increased public healthcare demands – never really added up. But the era of ultra-low interest rates allowed policymakers to kick any hard policy choices into the long grass. Not any more.
CTV News
7 days ago
- Business
- CTV News
Investors brace for record Canadian government debt issuance as budget delayed
The Bank of Canada is seen in Ottawa, on Wednesday, April 16, 2025. (THE CANADIAN PRESS/Justin Tang) Canada's government debt issuance is expected to surpass a pandemic-era record high this fiscal year, which could raise borrowing costs and add to calls for the ruling Liberal Party to be more transparent on its spending plans. Prime Minister Mark Carney has said his government, which retained power in last month's general election, will present a budget in the fall. The budget is typically tabled by April, the first month of the fiscal year. With debt issuance running high, some analysts and investors worry the budget could reveal a surprise increase in government spending for the current fiscal year, resulting in increased bond issuance that needs to be absorbed by the market in a shorter space of time. Canada sends about 75 per cent of its exports to the United States so its fiscal outlook is particularly uncertain as the U.S. wages a global trade war. Still, analysts can estimate Canada's borrowing needs for 2025-26 by taking the government's forecasted financial requirement in a December economic update, adjusting it for increased spending in the Liberal Party's campaign platform and adding maturing debt. The estimate comes to C$628 billion ($457.26 billion), according to Reuters calculations. That would exceed 2020-21 debt issuance of C$593 billion, and mean an even greater increase in the net supply of debt after much of the pandemic-era debt was purchased by the Bank of Canada to support the economy. Bond maturities are historically high as some of the additional debt load accumulated during the pandemic comes due, while deficit spending remains elevated and the government began last year purchasing mortgage-related bonds to help lower the cost of housing. Investors tend to demand higher returns for the risk of providing larger loans. 'We do think that this will have an impact on Government of Canada bond yields,' said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities. He forecast a steeper yield curve in Canada, where long-term borrowing costs rise faster than short-term rates, and debt issuance of C$645 billion this fiscal year. His supply estimate anticipates lower economic growth than used in the Liberal platform. 'Whatever is going to be in the budget, the more time the market has to process it, the easier it is for the market to digest that supply,' Kelvin said. The Canadian 10-year yield has already climbed more than 50 basis points from its trough in April to 3.31 per cent, tracking a move in U.S. yields as a worsening fiscal outlook for the United States raises concerns about demand for U.S. government debt. The 10-year yield remains low by historic standards, but is trading 63 basis points above the 2-year rate, which is nearly the largest gap since November 2021. While fiscal policy is a concern for long-term investors, the Bank of Canada's interest rate-cutting campaign has helped anchor short-term rates. Investors have said that Carney's experience as a central banker is reassuring, but the long wait for a budget is unwelcome. 'It raises questions about transparency and contributes to greater economic and fiscal uncertainty,' said Joshua Grundleger, director, sovereigns at Fitch Ratings. 'It would be helpful for markets to have a clear sense of which aspects of the party platform will be implemented and what the ultimate impact will be on deficits, debt and the taxpayer,' Grundleger said. Canada's debt is popular with foreign investors but that demand cannot be taken for granted, analysts said. The Canadian dollar accounts for only a small share of foreign exchange reserves held by central banks. 'Markets need greater clarity sooner on debt issuance plans,' Derek Holt, head of capital markets economics at Scotiabank, said in a note. 'If you're going to do (the) fall, make it September.'
Telegraph
26-05-2025
- Business
- Telegraph
Labour giveaways risk sparking £30bn tax raid
Rachel Reeves is being forced towards a tax raid of up to £30bn by benefit giveaways and her struggle with rising borrowing costs. Experts fear higher taxes are now inevitable after Labour pledged to restore winter fuel payments and review the two-child benefit cap, piling costs on the beleaguered Chancellor. The growing pressure risks driving the Government to break a manifesto pledge not to increase income tax, National Insurance and VAT, economists warned. Stephen Millard, acting director of the National Institute of Economic and Social Research (NIESR), said: 'It is pretty much inevitable now that she will have to raise one of those big taxes.' Mr Millard said the amount the Chancellor will be forced to raise could range anywhere from £10bn to £30bn. It follows record tax increases of £40bn by Ms Reeves last year, which the Chancellor has promised not to repeat. Mel Stride, the shadow chancellor, said Ms Reeves was 'out of her depth', adding: 'Rachel Reeves, our tin foil Chancellor, has folded at every turn – rewriting fiscal rules and then constantly teetering on the edge of breaking them, while at the same time fuelling speculation over welfare U-turns.' Looming costs Ms Reeves left herself only a wafer-thin margin of error of £9.9bn at the Spring Statement against her fiscal rules. Around £4.4bn of this buffer has already been wiped out by Donald Trump's trade war pushing up borrowing costs, according to Capital Economics. Meanwhile, Sir Keir Starmer last week bowed to pressure from backbenchers and abandoned steep cuts to pensioners' winter fuel payments, an about-turn that will cost the Treasury up to £1.5bn. The Prime Minister is also understood to be pushing for the abolition of the two-child benefit cap, which experts widely blame for a rise in child poverty, potentially costing a further £3.5bn by the end of the decade. Public sector pay deals will cost the Treasury around £2bn more than previously budgeted for, although the Government intends to try to make departments offset this with savings elsewhere. A crackdown on migration will also plunge the Chancellor £7bn further into the red against her fiscal rules, previous analysis by the fiscal watchdog suggests. The combined cost to the Treasury stands at more than £18bn, with the risk of another blow if the Government's fiscal watchdog downgrades estimates for productivity growth that are widely regarded as over-optimistic. Ms Reeves will come under heavy pressure from her own party to fill the gap with tax rises rather than spending cuts. Last week The Telegraph disclosed a leaked memo by Angela Rayner, the Deputy Prime Minister, calling for a raft of tax increases on higher earners and the wealthy. Treasury figures on Monday sought to cast doubt on Ms Rayner's maths, suggesting she had overestimated how much could be raised by the tax grab. Richard Tice, deputy leader of Reform UK, said: 'Labour has lost control of the economy, mainly due to Reeves's wild public sector pay rises. More taxes will ruin what's left of the economy and more entrepreneurs are leaving her car crash by the week.' Productivity problems Ms Reeves is in danger of a further blow when the Office for Budget Responsibility (OBR) next assesses the UK's productivity, potentially forcing her to raise taxes even further. A downgrade to its productivity forecasts would mean the economy is projected to grow more slowly than currently expected, decreasing the predicted tax take. Figures from the Office for National Statistics (ONS) on Friday showed that the private sector is 0.7pc less productive than it was before the pandemic, in a development that is unlikely to help the Chancellor. Even a 0.1 percentage point cut a year to productivity forecasts from 2025 to 2029 could knock £10bn off the fiscal headroom. Yael Selfin, chief economist at KPMG, said: 'The OBR assumption of longer-term productivity is relatively optimistic. It is possible that they may decide to revise that assumption downward, in which case there'll be less fiscal room.' 'Iron-clad' fiscal rules Ms Reeves will hope that trade deals with the EU, India and the US will help buy her back some breathing room. But if the Chancellor is tens of billions of pounds in the red by autumn, she must choose between tax rises, spending cuts or tweaking her fiscal rules. Loosening Ms Reeves's 'iron-clad' fiscal rules would threaten another gilt meltdown pushing up borrowing costs, if bond vigilantes sense the Chancellor's discipline is slipping. Britain's tax burden is already at a 75-year high, after the Chancellor raised taxes by a record £40bn last autumn. In a further headache for the Chancellor, the Government's borrowing for the year ending in March overshot OBR forecasts by £11bn. A Treasury spokesman said: 'The fiscal rules are non-negotiable. We put them in place to create stability and support investment and have seen what happens when fiscal rules are put to one side. 'We are delivering growth built on strong and secure foundations through our Plan for Change, and we've seen the fastest economic growth in the G7 in the opening quarter of the year. At the same time, we're also protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of Income Tax, employee National Insurance or VAT.'
Globe and Mail
24-05-2025
- Business
- Globe and Mail
Bond Market (TLT) Anxiety Grows as Moody's Downgrades US Credit Rating
U.S. long-term borrowing costs are climbing sharply as bond markets express mounting anxiety about America's ballooning fiscal deficits. The term premium on 10-year Treasuries (TLT)—extra compensation investors require to hold long-term bonds—approached 1%, a level unseen since 2014. Investors' unease was exacerbated by Moody's downgrade of U.S. sovereign debt and weak demand in recent Treasury auctions, reflecting skepticism toward the nation's widening budget gap and surging debt burden. This week's turmoil was amplified by the U.S. House passing a multitrillion-dollar extension of Trump-era tax cuts, raising fresh fears that the nation's fiscal trajectory is unsustainable. As 30-year Treasury yields briefly touched 5.15%, their highest level in nearly two decades, markets sent a clear message: investors are demanding greater compensation for taking on long-term U.S. debt, which historically was considered the world's safest asset. Market Overview: 10-year U.S. Treasury term premium nearing highest levels since 2014 30-year yields surge past 5%, reflecting deepening fiscal concerns Global bond yields also rising amid deficit worries and inflation fears Key Points: Moody's downgrade and weak Treasury auctions amplify debt market anxiety Trump's extensive tax cuts exacerbate fears of unsustainable borrowing Investors shifting away from U.S. assets due to persistent policy uncertainty Looking Ahead: Long-term borrowing costs likely to remain elevated amid fiscal uncertainty Risk of foreign central banks selling U.S. Treasuries increases as yields rise globally Persistent market volatility expected unless U.S. fiscal policy regains investor confidence Bull Case: Despite Moody's downgrade and rising yields, some prominent Wall Street strategists view any resultant dip in stocks as a buying opportunity, particularly if broader geopolitical conditions, like trade truces, show signs of improvement. The U.S. has a history of effective monetary policy led by an independent Federal Reserve, which can help navigate economic challenges and mitigate the impact of fiscal concerns on markets. The Treasury Secretary has downplayed the immediate impact of the Moody's downgrade, expressing confidence that administration policies will spur economic growth capable of managing the debt burden. While rising yields increase borrowing costs, higher yields on U.S. Treasuries could, in some scenarios, attract certain investors seeking better returns, potentially supporting demand for U.S. debt if risk perceptions stabilize. Stock markets have demonstrated resilience, with instances of investors buying on dips, suggesting underlying confidence in U.S. corporate performance or the broader economy's ability to absorb shocks. Bear Case: Sharply rising U.S. long-term borrowing costs, with the 10-year Treasury term premium nearing its highest since 2014 and 30-year yields surpassing 5.15%, reflect deep investor anxiety about America's ballooning fiscal deficits and surging debt burden. Moody's downgrade of U.S. sovereign debt and weak demand in recent Treasury auctions amplify concerns that the nation's fiscal trajectory is unsustainable, potentially leading to persistently higher borrowing costs for the government, businesses, and consumers. The U.S. House passing a multitrillion-dollar extension of Trump-era tax cuts adds to fears of an unmanageable deficit, which the Congressional Budget Office estimates will significantly increase the national debt. There are growing signs of foreign investors retreating from U.S. assets due to persistent policy uncertainty and fiscal risks, which could trigger a dangerous feedback loop of rising yields and diminishing demand for U.S. debt. Turmoil in other major bond markets, such as Japan, where yields are hitting multi-decade highs amid concerns over its own fiscal health and changing monetary policy, could reduce global demand for U.S. Treasuries as domestic Japanese bonds become more attractive or as carry trades unwind. The traditional status of U.S. Treasuries as the world's safest asset is being challenged, with investors demanding greater compensation for taking on long-term U.S. debt, signaling eroding confidence in U.S. fiscal management. Sustained high Treasury yields (e.g., 10-year above 4.5%) can pressure stock valuations and create headwinds for the equity market. Japan's bond market also encountered significant turmoil, as reduced purchases by the Bank of Japan and escalating inflation drove yields to their highest levels since the 1990s. Japanese policymakers warned of potential instability, suggesting government intervention may become necessary if conditions worsen. Strategists highlight that Japan's bond woes could spill over into global markets, notably impacting demand for U.S. Treasuries. Going forward, sustained pressure on bond yields underscores deep-rooted skepticism about the ability of governments, particularly the U.S., to manage their spiraling debts amid higher interest rates. Investors now confront a market in which traditional safe havens are increasingly viewed as risky, raising the stakes for policymakers globally. As fiscal uncertainties deepen, expect the trajectory of U.S. debt costs to play a critical role in shaping investor sentiment in the months ahead.
Telegraph
19-05-2025
- Business
- Telegraph
US borrowing costs jump after loss of top credit rating
US borrowing costs jumped and the dollar weakened after America was stripped of its prized top credit rating. The yield on 30-year treasuries, as US government bonds are known, rose above 5pc in early trading on Monday. Yields move inversely to price, meaning investors are selling US debt and demanding a higher interest rate to hold it. Long-term borrowing costs for Washington are now at their highest level since late 2023 and compare to rates as low as 1.2pc in 2020. The dollar also slipped on Monday morning, dropping to $0.75 against the pound. It came after Moody's cut the US's top sovereign credit rating by one notch on Friday, becoming the last of the major ratings agencies to downgrade the country. It cited concerns about the growing $36 trillion federal debt pile. Jim Reid, a strategist at Deutsche Bank, said: 'This is a major symbolic move as Moody's were the last of the major rating agencies to have the US at the top rating.' Concerns about the US debt come as Donald Trump seeks to push through a package of new tax cuts that economists fear could worsen federal finances. Analysts say the plan, which would extend the 2017 cuts from Mr Trump's first term, would add $3 trillion to $5 trillion to the nation's debt over the next decade. Moody's cited the rising debt for its decision on Friday to downgrade the US credit rating. The debt pile is on track to reach 134pc of GDP by 2035, the agency said. Mr Trump's sweeping tax cuts bill, which had been stalled for days by Republican infighting over spending cuts, won approval from a key congressional committee on Sunday to advance toward possible passage in the House of Representatives later this week. The action was a big win for Mr Trump and Mike Johnson, the House Speaker, after hardline Republican conservatives blocked the bill on Friday over a dispute involving spending cuts to the Medicaid healthcare programme and the repeal of green energy tax credits. Mr Johnson said the Moody's downgrade showed the need for the bill. He said. 'We're talking about historic spending cuts. I mean, this will help to change the trajectory for the US economy.' Scott Bessent, the US Treasury, blamed Moody's downgrade on Joe Biden. He told NBC's Meet the Press on Sunday: 'We didn't get here in the past 100 days. It's the Biden administration and the spending that we have seen over the past four years that we inherited.'
