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Latest research finds that government debt is set to soar a record $71 trillion in 2022
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In the most recent Sovereign Debt Index published today, British Asset Manager Janus Henderson
In the most recent Sovereign Debt Index published today, British Asset Manager Janus Henderson predicted a 9.5% rise in global government debt.
This aligns with similar trends of fresh borrowing, which is also set to remain elevated this year.
In 2021, global government debt jumped by 7.8% to $65.4 trillion as countries saw borrowing debits. This came at the same time that debt servicing costs dropped to a record low of $1.1 trillion.
However, debt servicing costs are predicted to rise significantly in 2022.
The global increase in debt is likely to be driven by the US, Japan and China markets – while every country will still see its borrowing levels increase.
Impact on the UK
According to Janus Henderson, the biggest impact will likely be felt in the UK. This is due to the combination of rising interest rates, impacts of higher inflation, and the costs associated with unwinding the country’s quantitative easing programme.
Economic tensions remain high in the UK, with taxpayers already contending with an unprecedented cost of living crisis as inflation rises and energy bills skyrocket.
As stated by Bethany Payne, a Portfolio Manager of Global Bonds at Janus Henderson, the “pandemic has had a huge impact on government borrowing – and the after-effects are set to continue for some time yet.”
Karen Vartapetov, S&P Global Ratings Credit Analyst, went on to add that we “expect borrowing to stay elevated, owing to high debt-rollover needs, as well as fiscal policy normalization challenges posed by the pandemic, high inflation, and polarized social and political landscapes.”
Chancellor Rishi Sunak told Sky News that while “we are doing what we can to help families deal with rising prices, inflation is also pushing up our spending on debt interest – which is expected to reach £83bn this year.
Daniel Tannenbaum of price comparison, Proper Finance commented: “We must take a balanced and responsible approach to support people now, while also not burdening future generations, and we’re on track to drive public debt down by 2024-25.”
“We’re also making sure every penny of hard-earned taxpayer money is being spent on our world leading public services, including by setting up the Public Sector Fraud Authority to clamp down on criminals and the Efficiencies and Value for Money Committee to drive efficiencies across government.”
Opportunity for investment
It must be acknowledged however, that rising global government borrowing levels bring new opportunities for investors.
In the height of the pandemic, we saw the convergence of monetary policy, as central banks cut their interest rates to historic lows in attempts to support failing economies.
However, as noted in the report, divergence is now emerging as a key global theme. Central banks in major markets including the US, UK, Europe, Canada and Australia are now looking to tighten their policies in an attempt to contain inflation.
This divergence will offer investors the opportunities in short-dated bonds – which are essentially less susceptible to market conditions.
These shorter-dated bonds, particularly in both China and Switzerland, at present look much more attractive in comparison to riskier long-term ones – with these bonds benefiting from higher yields than they would have even just a few months ago.
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Debt servicing refers to the cash required to cover the repayment of interest and principal on a debt for a particular period.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.
Short-dated bonds are fixed-income securities that mature in a short period, typically within one to three years, making them less sensitive to interest rate changes.
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