European Monetary Stimulus Likely as Global Bond Market Swells $4 Trillion

The size of the global bond market has risen to near its historic record just as European policymakers mull a new monetary program that could raise demand for bonds even further.

Worldwide, new bond issues rose $3.96 trillion, according to data compiled by Bloomberg. That number includes corporate, government, and municipal debt, which has swollen just as bond yields have fallen on lower inflation expectations.

The size of the global bond market has risen to near its historic record just as European policymakers mull a new monetary program that could raise demand for bonds even further.

Worldwide, new bond issues rose $3.96 trillion, according to data compiled by Bloomberg. That number includes corporate, government, and municipal debt, which has swollen just as bond yields have fallen on lower inflation expectations.

Bond issuances were $7 billion higher in 2012, when bond yields globally fell shortly before the United States began its quantitative easing program. Ten-year U.S Treasury yields fell throughout 2012 to end the year at about 1.7%, down from their peak in March of that year at 2.18%. That trend continues in 2014, when Treasury yields spiked at 3% in January and fell steadily from March to the present day, when 10-year yields have fallen to 2.28%. U.S. Treasuries are down about 70 basis points from the same period a year ago.

Falling oil prices and lower growth expectations worldwide have prompted bond yields to fall in global markets, which have also encouraged greater borrowing from corporate and municipal entities. However, uncertainty around the bond market remains, as the Federal Reserve has hinted at raising rates in 2015, but analysts question whether a rate hike is possible as commodity prices fall.

European Debt Vultures

Thanks to falling yields, large corporations and governments have found it much easier to raise capital at low rates, which has encouraged debt issuances to soar throughout the European Union. In total, Europe has seen $1 trillion of corporate bond issuances, up 3.2% year-over-year. Volkswagen raised over $26 billion in 2014.

The growing pace of debt issuances in Europe has alarmed some analysts, while others insist that the trend will not end unless the ECB steps in and purchases debt. In a meeting with the Governing Council, Mario Draghi today has discussed when and how the bank can begin purchasing debt.

Debt issuances and purchasing plans have done little to help European growth. On Wednesday, Markit Economics announced that the European PMI fell from 52.1 to 51.1, indicating lower growth for services and manufacturing in the Eurozone.

Market conditions in the Eurozone are growing increasingly uneven. Both Italy and France have recently reported record levels of unemployment. Meanwhile, unemployment in Germany has reached new lows even as wages remain flat.

Analysts are growing increasingly confident that the ECB will act swiftly to counter the low growth and high unemployment rates in Europe. In a report submitted to clients, UBS said that the ECB is likely to begin a quantitative easing program in March. That prediction was a sharp reversal from earlier predictions, in which UBS said Europe’s bank would not initiate any bond-buying program.

Record Low Rates

The ECB has cut interest rates several times in 2014, and short-term interest rates have gone negative in Germany. The expected balance sheet boost by the ECB to early 2012 levels is an attempt to stimulate growth that, in turn, would cause short-term interest rates to rise. However, it remains unclear when and how the bank will expand its balance sheet.

The German Bundesbank has repeatedly downplayed the likelihood of an aggressive bond-buying program from the ECB, suggesting that monetary policy cannot stimulate growth.

Meanwhile, growth rates have fallen to their lowest point in 17 months in Germany. Markit Economics also noted that Italy was seeing modest economic acceleration, while recent strength in Greek output has reversed. Factory output was unchanged in Greece in November, while operating conditions deteriorated for the third straight month.