Analysis: For all the debt, there's a shortage of bonds

Wed May 15, 2013 1:58am EDT
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By Mike Dolan

LONDON (Reuters) - Debt may be everywhere but there's a scarcity of bonds.

With governments awash with debt and furiously selling new securities to fund bloated budget deficits, the idea of a bond shortage on the marketplace may sound puzzling.

Yet not only is "quantitative easing" by the world's major central banks sucking benchmark bonds out of the system, new regulations to strengthen banks and derivatives markets that effectively ring-fence bond holdings at commercial banks has raised concerns about a lack of bonds to lubricate the system.

And while Federal Reserve Chairman Ben Bernanke claims to be monitoring any sign of a reckless "reaching for yield" among investors as government and corporate borrowing costs sink around the globe, the skew in supply and demand for bonds speaks volumes.

JPMorgan estimates that the world's central banks and commercial banks alone now hold some $24 trillion worth of bonds - or 55 percent of the entire $44 trillion universe of government, asset-backed and corporate bonds as captured by Barclays Multiverse Global Bond Index.

What's more, these players hold more than two thirds of the government bond subset, which amounts to about $25 trillion.

"That's why we are in such a depressed bond yield environment," said JPMorgan economist Nikolaos Panigirtzoglou.

Cumulative bond buying since 2008 by four major central banks alone - the Fed, Bank of Japan, European Central Bank and Bank of England - reached more than $4 trillion this year. Added to existing holdings, that brings their total to $5.2 trillion.   Continued...

The U.S. flag hangs outside the New York Stock Exchange November 9, 2011. REUTERS/Brendan McDermid