Investors are bracing for an epidemic of government borrowing

The black zero.
The black zero.
Image: Reuters/Markus Schreiber
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Politicians from Washington to Berlin are readying their bazookas, preparing to unleash trillions of dollars of spending and loans as coronavirus brings parts of the economy to a standstill. Government bond yields are climbing as investors brace for a level of borrowing seldom seen outside of wartime.

Government officials are readying at least $2.8 trillion of stimulus, according to data compiled by Quartz, as restaurants and shops close and travel is cancelled to stop the spread of Covid-19. Germany and Spain are proposing some of the most aggressive measures, with stimulus efforts of around 16% of gross domestic product. In the US, the Trump administration is looking to spend $1 trillion or more; plans to write $1,000 checks for Americans appear to have support in Congress.

The glut of debt threatens to raise borrowing costs, and government bond yields are jumping as investors prepare for a potential tidal wave of borrowing. Yesterday, interest rates on US Treasury bonds due in 10 years jumped the most since 1982. The US benchmark bond is yielding around 1.1%, according to FactSet data, after dropping below 1% earlier this month for the first time in history. Ten-year German bund yields rose to -0.3%, while similar-maturity Italian bond rates jumped to 2.76%, compared with 0.9% a month ago.

Longer maturity Treasury yields are rising as traders sell whatever they can—which can be the safest, most liquid government bonds—and as investors bet on a growing supply of sovereign debt, Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research, said on Twitter. “More the former than the latter,” she wrote.


Governments and other institutions around the world are looking to buy their countries time until the crisis is curtailed. The stimulus measures proposed so far will most likely be supplemented by other efforts down the road.

As travel restrictions on the European continent kick in, a form of joint-EU bond issuance—a coronabond—is being considered. This type of risk sharing has long been taboo for officials in countries, like Germany, that have the soundest finances in Europe. The pandemic has reportedly driven German chancellor Angela Merkel to at least entertain the discussion. Italy is among the countries outside of China that have been hardest hit by the virus, yet its finances are among the most stretched: The country’s ratio of government debt to gross-domestic-product is around 138%, more than twice that of Germany.

“The whole point of having a sound government balance sheet is to be able to go all out in situations like this, which is tantamount to a war,” Harvard professor Kenneth Rogoff said in an email. “Countries that are not able to do this will suffer not just in the short run, but in the long run.”