The surfeit of demand in the bond market that has kept yields near historic lows will continue in 2015 according to JP Morgan. The bank says demand will outstrip supply by some $400 billion, in part due to increased buying by central banks in Japan and Europe. These purchases are expected to mop up any supply freed by the US Federal Reserve’s end of its quantitative easing program.
JP Morgan says there will demand for $2.4 billion of bonds next year, after a supply shortfall of nearly half a trillion dollars this year.
According to Bloomberg, benchmark yields in all 25 developed nations that the service tracks have declined, “with those in Germany, Italy and France setting record lows.”
This is a great environment for issuers, of course. But the amount of unsatisfied demand could also help offset worries about bond market liquidity that have arisen due to the major dealers’ ongoing need to shed assets. Dealers’ unwillingness to make markets, especially in more exotic names or odd lots, has raised concerns that the market is much more vulnerable to shocks. (See The Outlook for Bond Liquidity Worsens, Aug. 12, 2014.)
Specifically, the additional $400 billion in additional demand could act as a buyer of last resort. However, since dealers are still the principal client-facing intermediaries, their reluctance to seize opportunities could still act as a drag on the market.