The rebound of global growth is sounding the death knell for easy money, so debt markets should see the backs of central banks in 2018, although a gradual withdrawal should help avoid a new tantrum sending interest rates spiking. The colossal sums that central banks injected into the financial systems to ward off economic cataclysm went primarily into the debt markets, which will have the biggest adjustment to make as part of the so-called normalisation of monetary policy by central banks. As central banks slow down their purchases of debt and then reduce their holdings the interest rates that governments and companies pay to borrow money are expected to climb higher. While everyone expects borrowing costs to rise in 2018, the key question is whether it will happen smoothly or not. Any disruptions in the credit markets can have a severe impact on the overall economy.
In Europe, where the European Central Bank (ECB) is set to continue buying 30 billion euros of assets each month until September, ultra low or even negative on certain maturities, there is a not of optimism in the air. Most bond market experts see the greatest risk as sharp readjustment of the market where interest rates spike higher, as happened in the 2013 "taper tantrum" when investors panicked in reaction to news that the U.S. Federal Reserve would reduce, or taper, its purchase of bonds, thus sending rates of return surging higher.
With the Fed taking the lead in the normalisation, cutting its holdings of bonds along with raising interest rates, investors and experts are looking at how borrowing costs evolve there.
There have been a few voices of caution, such as S&P Global Ratings and the International Monetary Fund's chief economist, Maurice Obstfeld.
"If you look around the world, there is a lot debt," Obstfeld said recently. "If there were a sudden rise in U.S. interest rates, that could put a lot of debtors under stress."
In the United States, the Fed did not include corporate bonds in its buying programme, whereas the ECB did. But even if European firms will have "live with this exit, without the ECB, the balance between supply and demand is in their favour," said Orsini at Societe Generale. Moreover, "since 2008, and that is one of the big lessons of the crisis, companies are preparing for periods" when debt markets are unaccessible and are managing their liquidity prudently, he said.