One consequence of the monetary policies developed in response to COVID-19 is that central banks will have a much stronger focus on financial stability in the years ahead, which may have some impact on free market operations.
The head of Australian fixed interest at asset manager Janus Henderson Investors, Jay Sivapalan, said that at the end of 2020 central banks held 24 per cent of global government debt, after buying close to half of the government debt issued last year.
The proportion of government debt held by central banks rose 5 percentage points in one year.
Sivapalan said: “A big focus now is how investors react to that. Will they maintain confidence in the strategies being pursued by central banks and in the functioning of the markets?
“All asset values are inflated. Investors don’t want to see a disorderly normalisation of bond yields. Central banks have to maintain trust in the system.”
Sivapalan was speaking at the launch of the Janus Henderson Sovereign Debt Index, which forecasts that after rising US$12.1 trillion in 2020, government debt will increase by a further US$4 trillion this year.
The biggest government debtors are the United States, Japan, China, France and Italy. Australia comes in at number 13 and its borrowing is still relatively small on a GDP basis.
The biggest borrower relative to GDP was the United Kingdom.
According to the Janus Henderson index report: “Central banks will continue to be active in the markets for years to come, so yields are likely to rise less than the rebound in economies would otherwise imply.
“Governments need to refinance record levels of debt, so central banks are incentivised to keep interest rates low across the yield curve.”