"Weak Growth Is the Fundamental Reason Behind the Global Government Bond Sell-Off"

[Financial News]  

The recent global government bond sell-off may have been driven less by massive fiscal deficits than by slowing growth, analysts said. Doubts about the economies themselves triggered the sell-off, sending yields—which move inversely to prices—sharply higher.
The Wall Street Journal reported on June 2 (local time) that the major economies whose government bond prices plunged together this time have much lower fiscal deficits as a share of their economies than the United States.

The International Monetary Fund (IMF) forecasts that Japan’s fiscal deficit will be around 2% of gross domestic product (GDP) this year, the lowest among the Group of Seven (G7) countries.
Excluding interest payments, Italy is expected to post a small surplus instead. Deficits are rising in the United Kingdom and France, but they are nowhere near the level of the United States. The IMF forecasts that the United States’ fiscal deficit will climb to 7.5% of GDP this year and that this trend will continue through 2030.
Nevertheless, government bonds are being sold across the board, regardless of whether a country is reducing its fiscal deficit or seeing its deficit grow like a snowball.
Government bond yields, which move inversely to prices, are rising across all advanced economies regardless of their progress toward fiscal consolidation. Inflation, artificial intelligence (AI), massive debt, and increased defense spending amid heightened geopolitical tensions are among the factors unsettling investors.

The Wall Street Journal noted that low growth may explain why these countries have all faced government bond sell-offs despite their efforts to improve fiscal soundness.
The United States, which is running an overwhelming deficit, is expected to continue growing faster than other major economies over the next several years, driven by the AI boom.
By contrast, Europe, the United Kingdom, and Japan are trapped in a low-growth quagmire. They are expected to grow by only around 1% at best this year and next year—less than half the growth rate projected for the United States.
These countries have pledged to restrain government spending, but investors remain skeptical. If growth stagnates, weak tax revenues will make it difficult to fund pensions. Financing the recent expansion of military spending will be particularly challenging, making further government bond issuance unavoidable, investors believe.

Optimism about AI is also pushing government bond yields higher.
If the Fourth Industrial Revolution triggered by AI fuels an economic boom, inflation could rise along with it. Yields also increase because investors demand higher returns from holding bonds as the prices of other assets rise.
Demographic trends are also cited as one of the factors behind low growth and rising government bond yields.
Europe and Asia face much more severe demographic pressures than the United States. Their working-age populations are shrinking rapidly. Without productivity gains driven by technological advances, they cannot avoid a decline in potential growth rates.
If an economy falls into a low-growth quagmire, questions inevitably arise about how it can repay the fiscal debt accumulated over the years.
Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore, noted, "This ultimately comes down to the issue of fiscal sustainability," adding, "It is not simply a matter of growth, but of the willingness to make difficult political choices."


[email protected] Song Kyung-jae Reporter