“It’s not easy to say no to the Chinese government,” says John Foley on Breakingviews. “Unless you’re a bond investor.” Last week, the ministry of finance suffered three ‘failed’ or ‘uncovered’ bond auctions (a failed auction is one in which the government is unable to sell as much debt as it intended).
While this occurs quite frequently in some countries because of the way the auctions are structured – nine out of 37 German auctions failed in 2008, according to Moody’s – they’re rare in China, says Wang Ming on Dow Jones; the last time it happened was in 2003.
China’s auction failures were down to two factors, says Foley. One is tough competition – this week will see the first Initial Public Offering (IPO) on the Shanghai exchange since September. The second is concern about higher inflation on the back of soaring lending. Both make yields of around 1%-1.25% on bonds look “paltry” and suggest that China may eventually have to offer higher rates to shift debt. Even so, it is in a better position than much of the world.
Many governments have a “serious problem”, says John Mauldin on Investors Insight. Total sovereign debt issuance this year alone is projected to be $5.3trn, or around 9% of global GDP, according to Hayman Capital. America alone needs to raise $3trn to replace falling taxes, fund stimulus spending and meet off-budget items, such as supporting the financial sector. “There is simply not enough available capital under current conditions to do it all.” Yet encouraging higher household savings to mop up the debt, for example, will mean lower consumption and a slower recovery.
Making matters worse, the biggest holders of US debt are government welfare programmes, such as Medicare, says Jeremy Batstone-Carr of Charles Stanley. These invest all the social security contributions they receive in Treasuries. Unfortunately, Medicare is now becoming a net seller of bonds, since its premium income of $14bn is easily outstripped by expenditure of $348bn. And other buyers such as central banks, mutual funds and state and local governments are turning net sellers, forcing the Federal Reserve to buy up the surplus. With funding issues like this, “the US economy is in far worse health than most investors, or the media, would care to imagine”.