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The supply of debt may be recovering, but a shortage of confidence on the part of companies is keeping demand subdued.
That cycle — a bountiful supply of debt feeding a seemingly insatiable demand — sputtered to a halt this summer, leaving Puerto Rico with more debt than it can easily pay.
Holding down demand, he said, were the currently higher yields, uncertainty over a growing supply of debt and the change this week in leadership at the Federal Reserve, which fixes benchmark short-term interest rates.
The Treasury plans to sell a record $22 billion of 5-year notes today and $11 billion of 10-year notes tomorrow, swelling the supply of debt to finance the country's first budget deficit in five years.
Data from Standard & Poor's, a rating agency, show that the default rate for speculative-grade American bonds in the 12 months to February was 2.3%, well below the historic average.Furthermore, central-bank purchases of bonds have reduced the supply of debt available for investors to buy.
Greg Peters, a Morgan Stanley strategist, says that $57 billion of bonds and more than $200 billion of loans are already in the pipeline: a plentiful supply of debt to absorb the potential demand.It is hardly surprising, therefore, that investors have decided that higher yields are needed.
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We generally understand trends in supply of government debt, often measured by projected debt-to-GDP ratios in publications such as the IMF's own World Economic Outlook.
The credit crunch has dried up the normal supply of new debt, which enjoys greater protection than the firm's pre-existing debt, and therefore flows more freely.
In the years that followed, it skewed its borrowing to the long end of the yield curve because it expected slower GDP growth, says Carlos Steneri, who heads the country's public-debt agency.Domestic savings pools have deepened over the past decade to absorb the supply of local debt issues.
"The supply of delinquent debt is growing exponentially," said Mr. Siegel of Franklin Credit Solutions.
These include anticipation of an economic recovery, the increasing supply of government debt, the mounting fiscal deficit, and skepticism about the Federal Reserve's huge intervention.
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