Inflation is the main risk facing global bond markets, a senior OECD official told Reuters, as energy prices soar in the wake of the US and Israeli air war against Iran.
“We are now undergoing another major stress test,” Carmine Di Noia, the OECD’s director of finance and corporate affairs, said in an interview ahead of Wednesday’s release of the Paris-based organization’s annual debt report.
Oil prices have risen 16% this week, and bond yields have soared as investors worry that continued high energy prices could lead to inflation.
Di Noia then added that rising bond yields would “put even more pressure” on the bond market, given that funding needs and borrowing costs remain high.
Shorter maturities increase the risk of refinancing
The OECD expects governments and businesses to borrow $29 trillion this year, up from more than $25 trillion last year.
Di Noia said they are shortening the maturities of new bonds they sell, and rising yields could strengthen that momentum.
He noted that the disputes are adding to uncertainty as the bond market’s investor base is changing. Price-sensitive investors such as hedge funds are playing a bigger role in the market, and the OECD has warned that it could stimulate volatility.
The proportion of government debt issuance with maturities of 10 years or more has reached its lowest level since 2009, and will hit an all-time low for companies in 2025, according to an OECD report.
This increases the risk of refinancing, which will reach a record $13.5 trillion in 2025, accounting for 80% of OECD countries’ borrowings, as more debt matures earlier and rising yields accelerate the impact on debt costs. Emerging markets are particularly vulnerable, with more than a third of their bond inventories maturing over the next three years.
Post-pandemic interest rate hikes to combat inflation have pushed bond yields up significantly, increasing government interest payments. The OECD pointed out that by 2024, the amount would already exceed defense spending.
AI debt could transform corporate bond markets
The OECD said a surge in borrowing by AI companies rushing to expand demand for data centers and processors could make the corporate bond market more like “equities.”
The nine largest hyperscalers will need to fund $4.1 trillion in capital investment by 2030, according to the report. If half of that was raised on the bond market, nine companies could account for 15% of global corporate issuance. These include Amazon, Alphabet’s Google, Meta, and Microsoft.
Di Noia said these nine markets account for 12% of the world’s stock market capitalization, so merging the two markets could make it difficult for investors to diversify their investments and hedge their risks.
AI infrastructure could require approximately $5 trillion in additional investment by 2030, which could lead to significant increases in borrowing by sectors such as real estate, energy, and IT hardware.
“This calls into question the ability of the global non-financial corporate bond market, currently valued at $17.2 trillion, to absorb new supply of this size, especially against the backdrop of still-growing sovereign debt borrowing and a changing investor base,” the OECD warned.
(Reporting by Yoruk Bahceli; Editing by Dhara Ranasinghe and Emelia Sithole-Matarise)
