Market Overview

Surging world debt will exceed $255 trillion by the end of 2019 and will continue to rise. According to International monetary fund projections in 2022 general government gross debt in advanced countries will climb to 104.5% of GDP form 103.1% this year. Emerging market and developing countries general government gross debt expected to climb to 60.9% of GDP by the 2022 from 53.3% currently. 

In a past decade over $70 trillion to global debt was driven by governments and the non-financial corporate sector, each around $27 trillion. The bulk of debt (over $52 trillion) was generated by sovereigns. In emerging countries non-financial corporates led the rise by $20 trillion to over $30 trillion.

More worrying is that low interest rates and easing monetary policy worldwide prompted corporate and households’ borrowings in addition to sovereigns. Almost 40%, or around $19 trillion, of the corporate debt in major economies such as the U.S., China, Japan, Germany, Britain, France, Italy and Spain was at risk of default in the event of another global economic downturn. Countries with a high level of government debt such as Italy or with a swift growing indebtedness like Argentina, Brazil, South Africa, and Greece could suffer a shock in case of a turmoil. 

High level of debt curbs economic growth in many countries, EU nations too. Worldwide growth remains sluggish flagging the slide in a possible recession in a midterm. European Central Bank has already acknowledged low interest rates hurts the profitability of the banking sector with a strong negative effect on deposit-intensive banks. 

The global bond market could rapidly become a ground zero for some of the nations if investors rush to safe-haven assets like US Treasuries amid uncertainty due economic slowdown, Brexit or other global/regional risks. That’s a usual investors behavior. At the same time, China’s growing financial market should be kept in mind. China is continuously lifting limits on access of international investors to its financial industry. Chinese growing economy with transparent and stable financial assets could spark a huge interest as a safe-haven in a decade to come.

More gold less US debt

Rising share of gold in central bank reserves has become a new trend for a past few years. According to World gold council released in July 2019 11% of 155 emerging market and developing economy central banks say they intend to increase their gold reserves over the next 12 months. Last year 12% of them bought gold. This gave rise to 651 tonnes of central bank gold demand, the highest level on record under the current international monetary system. In the medium term, central banks see a greater role for the Chinese renminbi and gold. US sanctions, trade tensions are appetizing central banks’ gold mania. China’s Central Bank increased a share of gold in its reserves from 1.5% in 2010 to 2.7% in Q2 2019, Turkey increased its gold reserves from 5.7% to 16.2%, Russia – up from 5.4% to 19.3%. Those countries are among Top 10 with largest gold reserves.

On the other hand, foreigners sell US Treasuries with outflows in September 2019 hitting their largest since December last year. Foreign outflows totaled $34.324 billion in September only as reported by US Treasury department. China was a largest holder of US Treasuries before June 2019 when Japan took a lead. CNCB cited DBS bank as saying that China has already reduced its holdings by $88 billion during the last 14 months. China’s holdings of US Treasuries in September remains largely unchanged at $1,10 trillion. However, Japan’s holdings of US Treasuries decreased by $28.9 billion to $1.15 trillion. In total, foreign holders of US Treasury Notes and Bonds decreased by $34.32 billion, the second consecutive month decline for foreign holders of US Treasury debt. 

Early November China sold €4 billion in bonds for the first time in 15 years.

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