Central banks face test: Will they be good cops or bond villains?
TLT•A global bond selloff is raising pressure on central banks to support government debt markets even as they continue to reduce bond holdings. G7 central bank balance sheets have shrunk by about a third since early 2022, while G7 government debt has nearly trebled to more than $60 trillion.
1. Pressure to intervene
A bond market crunch is renewing questions about central bank independence as governments face rising debt-service costs. Central banks appear reluctant to resume broad sovereign bond buying, while spending cuts are unlikely to be a priority amid elections in the United States, France, Italy and Spain over the coming year.
2. Debt and balance sheets
The aggregate G7 central bank balance sheet peaked at more than $30 trillion in bonds in early 2022 and has fallen by about a third since. The Institute of International Finance estimates that G7 government debt has nearly trebled to more than $60 trillion, leaving annual interest expenses 85% higher even though average borrowing costs are back at mid-2008 levels.
3. Emergency support debate
Central bank officials have argued that emergency tools should support market functioning without becoming monetary stimulus, but the article notes that debt markets can face pressure without an acute crisis. IMF chief Kristalina Georgieva urged rich governments to make credible fiscal-consolidation plans and not rely on central banks to bail them out.
