By Yoruk Bahceli
LONDON, March 4 (Reuters) – Inflation is a major risk facing global bond markets, a senior OECD official told Reuters, as energy prices rose after a U.S.-Israeli air war against Iran.
“Now we have another big stress test,” Carmen de Noya, the OECD’s director of finance and enterprise affairs, said in an interview on Wednesday ahead of the release of the Paris-based organization’s annual debt report.
Oil prices rose 16% this week and government bond yields jumped on investor fears about inflation if high energy prices persist.
If that happens, higher bond yields will “put even more pressure” on debt markets given financing needs and borrowing costs remain high, De Noia added.
Short term increases the risk of refinancing
The OECD expects governments and companies to borrow $29 trillion this year, up from $25 trillion last year.
They’ve reduced the maturities of the new debt they’re selling and higher yields could reinforce that dynamic, Di Noya said.
He noted that the dispute has created uncertainty at a time when the investor base for bond markets is changing. Price-sensitive investors such as hedge funds play a major role in the markets, which the OECD has warned can cause volatility.
The share of government bond issuance over 10 years has fallen to its lowest point since 2009 and will hit a record low for corporates in 2025, the OECD report said.
This increases the risk of refinancing, which, with a record $13.5 trillion in 2025, will reach 80% of borrowing for OECD countries, as more debt comes in sooner and rising yields accelerate debt costs. Emerging markets, where a third of the debt stock matures in the next three years, are particularly vulnerable.
Post-pandemic rate hikes to combat inflation have significantly raised bond yields and pushed up government interest payments. The OECD noted that by 2024 it had already exceeded defense spending.
AI debt could transform the corporate bond market
Increased borrowing by AI companies as they race to expand data centers and processor needs may make corporate bond markets more “equity-like,” the OECD said.
The nine largest hyperscalers will need to finance $4.1 trillion in capital expenditures by 2030, the report said. Financing half of this in the bond markets would mean that nine companies might account for 15% of global corporate exports. They include Amazon, Alphabet Google, Meta and Microsoft.
As the nine account for 12% of global stock market investment, the convergence between the two markets may make it difficult for investors to diversify investments and avoid risk, De Noya said.
