1. Sovereign borrowing outlook for OECD countries

Abstract

Following the record rise in 2020, OECD government funding needs stabilised in 2021, although they remained higher than in the pre-COVID-19 period. The cost of government funding increased slightly from historically record lows, as economies gradually recovered from COVID-19 and monetary policy stances became less supportive. Although the strong economic recovery in 2021 has somewhat eased the government debt burden, it remains at record high levels in many countries and the legacy of the crisis casts a long shadow on public finances.

This chapter assesses the impact of the pandemic on sovereign borrowing needs and outstanding debt for 2020 and 2021, and provides projections for 2022. It highlights the benefit of lengthening portfolio duration during periods of low interest rates and maintaining issuance flexibility through the use of a variety of different securities to manage high financing needs. This chapter also points to the risk and policy challenges arising from high refinancing needs, rising inflation and interest rates, changing patterns of investor demand and uncertainties around the projected level of borrowing requirements.

1.1. Introduction

The macroeconomic policy response to the COVID-19 crisis has been the largest and fastest in peacetime. This chapter offers an overview of the impact of these policy measures on the level, composition and cost of sovereign borrowing and debt in the OECD area in 2020 and 2021, as well as the projections for 2022. The analysis presented is based primarily on data collected through surveys.

Key findings

The gross borrowings of OECD governments, which jumped by 70% in 2020 following the outbreak of COVID-19, are expected to gradually stabilise as economies recover and pandemic-related fiscal support is withdrawn. Aggregate government market borrowing needs are projected to decline slightly from above USD 16 trillion in 2020 to around USD 14 trillion in 2022, with marked differences across countries.
OECD government net marketable debt issuance is expected to decline from USD 8 trillion in 2020 to around USD 3 trillion in 2021. It is projected to remain at around the same level in 2022, which is double pre-pandemic levels.
Since 2019, the outstanding level of marketable debt for OECD governments increased by more than USD 10 trillion to USD 50 trillion in 2021, and is projected to reach USD 53 trillion in 2022. As a percentage of GDP, central government marketable debt for the OECD area rose by more than 16 percentage points to 90% in 2020, and is expected to gradually decline to 88% in 2022, driven inter alia by stabilised borrowing needs and low interest payments. These estimations for 2022, made before the war in Ukraine, are now subject to the economic effects of the war, as well as the monetary and fiscal policy responses.
The cost of borrowing has risen, but remains at low levels across OECD countries. In the OECD area, nearly 70% of the fixed-rate government bonds issued in 2021 were for a yield less than 1%. This ratio was 80% in 2020 and 37% in 2019.
Many countries sought to mitigate refinancing risk by lengthening issuance maturities. The average term-to-maturity of outstanding debt has almost fully returned to a pre-pandemic level standing at 7.6 years in 2021 and reached record highs in 16 OECD countries including France, Italy, Portugal, Spain and the United States.
Despite the extended maturities of new issuance, debt redemption profiles are expected to be elevated and may pose significant challenges in terms of refinancing risks, with 40% of outstanding marketable debt stock needing to be refinanced or repaid within the next three years.
Given the refinancing needs, rising yields, inflationary pressures and the prospects of less accommodative monetary policy, it is important for sovereign debt managers to strengthen investor relations and remain transparent and predictable in providing guidance to investors. They may also explore new borrowing instruments to support financing capacity.
Going forward, downside risks to the outlook include the potential emergence of new COVID-19 variants, persistent inflation and mounting geopolitical tensions. To ensure the continued smooth functioning of government securities markets, debt managers should remain vigilant, closely monitor the resilience of market intermediaries and co-ordinate with the relevant authorities to promptly address possible stressed market conditions. Authorities may benefit from tools such as security lending facilities, flexibility in their approach to issuance and maintaining contingency buffers to be able to absorb possible stress in markets.

1.2. OECD government market borrowings remain higher than pre-pandemic levels, but are showing some signs of stabilisation

Fiscal responses by OECD governments to the COVID-19 crisis necessitated significantly increased issuance of marketable debt. Total gross borrowings from OECD governments, which had remained stable at around USD 10 trillion after the 2008 financial crisis, rose from USD 9.6 trillion in 2019 to above USD 16 trillion in 2020. This was a result of the extensive use of direct fiscal policy tools to mitigate the economic impact of the pandemic (Figure 1.1). This represents the highest increase ever in a single year and almost double the rise related to the 2008 financial crisis. Responses to the 2021 OECD Survey on Sovereign Borrowing indicate signs of stabilisation (see Box 1.3 for the survey definitions and methodology changes). Estimates indicate that OECD governments borrowed approximately USD 15 trillion in 2021 and will borrow USD 14 trillion in 2022 from the markets. This marks a small decrease compared to the amount of borrowing in 2020 but remains markedly higher than pre-pandemic levels. It should be noted that these estimations were made ahead of Russia’s war against the people of Ukraine, when the fiscal stance was set to tighten gradually in 2022 mainly due to the gradual withdrawal of pandemic-related support measures. Considering the economic impact of the war and potential fiscal policy responses implemented by some countries, the downside risks to these estimates increase (OECD, 2022[1]).1

Gross borrowing needs consist of new borrowing plus refinancing needs. In 2021, a large portion of gross borrowings was used to refinancing maturing debt. The ratio increased from around 50% in 2020 to above 80% in 2021 and is projected to remain around that level in 2022. At the same time, new debt issuance to the markets declined significantly in 2021 and is projected to moderate to USD 3 trillion in 2022, largely due to economic growth and the withdrawal of fiscal support in most OECD countries. Despite the large drop compared to 2020, net borrowing needs remain significantly higher than pre-pandemic levels, which were around USD 1.3 trillion in the five years before the pandemic. It should be noted that projected net borrowing needs are subject to change depending on macroeconomic and fiscal developments during the year. For example, cash buffers in a few countries that were built-up though pre-funding in 2020 were drawn down in 2021, largely due to diminished volatility in cash flows.2

Figure 1.1. Fiscal and borrowing outlook in OECD countries, 2007-22

Figure 1.2 illustrates the trends in sovereign borrowings from the markets as a percentage of GDP for the OECD area, and for selected OECD groupings. Supported by massive fiscal policy and monetary policy support, economic growth in OECD countries rebounded sharply in 2021. The OECD Economic Outlook of December 2021 expects the GDP growth for the OECD area to reach 5.3% in 2021 and to moderate to 3.9% in 2022 (OECD, 2021[2]). Yet, recent illustrative simulations over the economic impact of the war in Ukraine suggest that GDP growth in the OECD area as a whole could be reduced by around 1 percentage point in 2022, if the shocks to commodity prices and financial markets seen since the outbreak of the war are sustained (OECD, 2022[1]). Against this backdrop, gross borrowing requirements in relation to GDP (which increased by more than 10 percentage points from 2019 to 2020) are estimated to decline by 6.6 percentage points by 2022. Compared to the OECD average, this decline in gross borrowing requirements is expected to be greater for “G7” countries’ – where ratios are already relatively high – and largely driven by the United States. Given the uncertainties around the impact of the war and fiscal support, there is a risk of upward deviation from these estimates, particularly those in the Euro area.

Figure 1.2. Gross borrowing through marketable debt as a percentage of GDP

EU Member countries have received significant financial support through the European Union, mostly in the form of loans from the SURE fund and grants and loans from the NextGenerationEU (NGEU) package. Given that this publication only covers government securities issued to finance central government budget deficits, the figures for Euro-area countries do not account for such funding sources. However, it should be noted that these additional funding sources will contribute to reduced borrowing needs from the markets over the short- and medium-term. In particular, NGEU grants are expected to generate additional fiscal space and reduce the pressure on debt-to-GDP ratio in EU Member countries (Pfeiffer, Janos and Jan, July 2021[3]). NGEU’s current financing schemes entail an annual bond issuance of up to an average of around EUR 150 billion per year between 2021 and 2026, meaning that the European Union is becoming one of the major issuers in European capital markets (Box 1.1). With respect to distribution, the support will be mainly directed to the countries that suffered a large negative effect from the crisis. Hence, Italy and Spain are expected to absorb 60% or more of the grant package over 2021-23 (OECD, 2021[2]).3

Box 1.1. The European Commission as a capital market participant

The European Commission, on behalf of the European Union, has been running several lending programmes to support EU Member and other countries over a period of 40 years. However, the size and complexity of the NextGenerationEU (NGEU) programme required a fundamental change in the EU’s approach to capital markets as an issuer. Hence, the Commission follows the practices used by sovereign issuers which comprise an open and transparent communication to market participants, a diversity of instruments and issuance techniques and the use of a structured network of primary dealers.

NextGenerationEU and its funding strategy:

NGEU is a temporary recovery instrument, which can raise up to EUR 750 billion at 2018 prices or some EUR 800 billion in current prices (5% of EU GDP). It aims to support economic recovery and build a greener, more digital and more resilient European Union.

The issuance of NGEU debt is planned to take place between mid-2021 and 2026. This entails average annual bond issuance of up to EUR 150 billion per year between mid-2021 and 2026. This would make the European Union one of the largest issuers in the Euro area in net terms.

According to the current setting, any NGEU issuance after 2026 will be limited in scale and consist solely of refinancing the maturing debt to smooth the budgetary absorption of liabilities over time. All borrowing will be fully repaid by 2058.

The funding strategy used under NGEU combines:

An annual borrowing decision which sets the yearly ceilings under which transactions can be undertaken;
A semi-annual funding plan with the targeted volumes and a tentative calendar for both auctions and syndications, to offer transparency and predictability to investors and other stakeholders;
Multiple funding instruments (conventional bonds, green bonds and EU-Bills) to maintain flexibility, and to manage liquidity needs and the maturity profile;
A combination of auctions and syndications, to ensure cost efficiency; and
Structured and transparent relationships with banks supporting the issuance programme (via a Primary Dealer Network).

Since it became operational in mid-June 2021, the European Commission has issued EUR 96 billion of bonds and bills through syndications and auctions. Weighted average maturity of the issuance reached 9.5 years as of end 2021, higher than the OECD average. In terms of the borrowing cost, the weighted average yield was -0.11% (Table 1.1). The bonds have been trading between yields on corresponding German and French bonds.

Table 1.1. NextGenerationEU and its funding strategy
Funding instruments	Volumes (in EUR billions)	Average maturity at issuance (in years)	Yield at issuance
Bonds	71	12.7	0.13%
Bills	25	0.3	-0.78%
Overall	96	9.5	-0.11%
Note: Issued between mid-June 2021 and end of December 2021
Source: European Commission, https://ec.europa.eu/info/strategy/eu-budget/eu-borrower-investor-relations/.

1.2.1. Net borrowing requirements have eased with significant differences among countries

Projections for gross financing requirements are driven by the refinancing of debt due in the year and new financing requirements for the current year’s budget (i.e. net borrowing requirements). Refinancing amounts for maturing debt are known with a high level of certainty in advance. Conversely, projections for net borrowing requirements are inherently uncertain. Even if tax and spending policies remain unchanged, actual gross borrowing needs may diverge from planned amounts due to various reasons, including economic and budgetary outcomes, market conditions and the timing of cash transactions.

In the OECD area, net borrowings from the market decreased by more than 60%, from almost USD 8 trillion in 2020 to USD 3 trillion in 2021. Most fiscal measures in 2020 had been designed to be short-lived. However, repeated COVID-19 outbreaks with new types of variants prompted authorities in some countries to extend fiscal measures further. While many fiscal programs are still providing significant support to the economy, their size and composition have adjusted in several countries as the pandemic evolved. In parallel, government financing forecasts in a number of countries were adjusted throughout the year in accordance with the changes in both budget outcomes and funding. The recent OECD Survey on Primary Market Developments revealed more than two-thirds of debt management offices (DMOs) experienced challenges with the sharp changes in government funding needs, and more than half found cash forecasting in 2021 difficult (Annex A). In 2021, net borrowings for the OECD area as a whole were lower than the planned amount for 2020, which was close to USD 5 trillion (OECD, 2021[2]). This was largely due to better-than-expected tax revenue outturns in several countries and the use of cash buffers in a few countries (e.g. the Netherlands and the United States).

Figure 1.3 illustrates annual changes in borrowing requirements in relation to GDP across countries in the wake of the pandemic. At the total OECD level net borrowing requirements in relation to GDP deteriorated by 11.6 percentage points over 2019-20 and improved by 9.3 percentage points for 2020-21. In 2020, aggregate net borrowing needs surged across the OECD area although the increase in funding needs varied greatly across countries with differences in the pandemic impact on economies. Differences in the capacity to increase direct fiscal spending, financial stability concerns, and the ability to raise additional funds from the markets also contributed to the variation across countries.

Following the acute phase of the pandemic, the size and composition of the fiscal responses have diverged. This reflects differences in automatic stabilisers, pre-pandemic fiscal space, the severity of infections, and policy preferences. Compared to 2020, borrowing needs, as a percentage of GDP, declined in most countries in 2021, and increased further only in a few countries. In some countries, such as Denmark, Japan, Korea, Poland and Portugal, the ratio of net borrowings-to-GDP declined to pre-pandemic levels in 2021.

This comparison also reveals that those countries with the highest annual decline in new borrowing levels in 2021 experienced the highest percentage point increases in 2020. Specifically, new borrowings in relation to GDP in Canada, New Zealand, Japan and the United States fell by more than 10 percentage points in 2021 (having increased by more than 15 percentage points from 2019 to 2020). This is largely due to strong economic growth and the associated improvements in primary fiscal balances. In some cases, the use of high cash balances, built up from pre-financing in 2020, also helped alleviate the need for new debt issuance in 2021, most notably in the second half of the year.

Figure 1.3. Annual changes in net borrowings from the markets as a percentage of GDP

1.3. Cost of funding remained low despite the recent rise

In the OECD area, funding conditions have generally remained favourable despite the surge in pandemic related borrowing. OECD countries were able to issue the substantial amount of new debt required without putting excessive upward pressure on borrowing costs. While this likely reflected, in part, strong market demand for low-risk assets, central banks played a major role in ensuring that sovereign debt markets continued to function smoothly. As well, highly accommodative monetary policies have supported economic activity. Investors’ perception of the pandemic as a one-off shock to debt dynamics rather than a structural deterioration in national fiscal positions also contributed to the low and stable borrowing costs.

Recently, financial conditions in the OECD area have tightened somewhat, amid aggravated inflationary pressures since the outbreak of the war in Ukraine. Many central banks have indicated an intention to accelerate the timing of monetary policy normalisation by bringing forward the timing of increases in their policy rates and concluding quantitative easing (QE) programmes (or unwinding balance sheets). It should be noted, however, that the pace of this policy normalisation varies considerably among countries, reflecting different stages of economic recovery from the pandemic, inflationary pressures and the impact of the war.

The Bank of England became the first major central bank to raise interest rates (in December 2021, in folloed by several subsequent increases) and has begun to reduce the stock of UK government bonds purchases by ceasing to reinvest the proceeds of maturing assets in March 2022. The US Federal Reserve ended asset purchases and raised its policy rate by 1/4 percentage point to 0.5 per cent in March 2022 and by half percentage point to 1 per cent in May 2022. At its April meeting, the European Central Bank has kept key its key policy interest rates unchanged and announced that it expected to conclude its asset purchase programme in the third quarter of 2022. Meanwhile, there has been no change in the quantitative easing policy of the Bank of Japan. As central banks try to find the delicate balance between stemming the inflation threat without having a significantly negative impact on economic growth, the changes in monetary policy stance have been clearly communicated so far and appear to have generated relatively little financial market stress.

Stronger growth, higher inflation and the gradual unwinding of highly accommodative monetary policy stances, including tapering of asset purchases by major central banks, have led to higher bond yields. The yields on government bonds finished 2021 markedly higher than the previous two years, although they are still low by historical standards. Over the year to December 2021 for the OECD area, yields on both 2-year and 10-year benchmark bonds rose by around 1% on average (Figure 1.4). Much of the increase for the longer end of yield curves is attributed to a combination of heightened inflation expectations, greater inflation risk premia and rising term premia (BIS, December 2021[4]). Despite that, government bonds were still trading at historically low yields, and sometimes even at negative nominal yields in several OECD countries at the end of 2021 (e.g. up to 5-year maturity in France and Japan, 10-year maturity in Germany).

Figure 1.4. Change in benchmark yields between December 2020 and December 2021

The figures reflect a significant rise in borrowing costs in some countries including Chile, Mexico, Poland and Turkey. In some cases, country-specific economic and geopolitical factors contributed to stressed market conditions and an erosion of credibility, in addition to the general decreased risk appetite of investors due to heightened global uncertainty.4 For example, in Turkey the lack of credibility in monetary policy has exacerbated capital outflows and led to currency depreciation and a surge in risk premia. Between 2019 and 2021, the share of non-resident holdings of domestic debt decreased from around 10% in 2019 to 3% in 2021, while the share held by public banks rose from about 26% to 39%. In Chile, concerns over the weakening of public finances, as well as rising political/social pressures led to credit rating downgrades. These downgrades, together with the reduction of public bonds in pension funds have added pressures on market funding conditions. Between 2019 and 2021, non-resident holdings of domestic debt fell from 20% to 13%, while this was compensated by increased domestic bank holdings.

This general increase in interest rates meant that government funding costs rose in 2021, particularly in the fourth quarter. In addition, the longer average maturities for new issuance, as discussed in Section 1.4, contributed to the higher overall cost of borrowing.5 Figure 1.5 illustrates volume shares of fixed-rate bond issuance by yield category for 2020 and 2021. Despite the increase in interest rates over the last months of the year, nearly 70% of the fixed-rate government bonds in the OECD are were issued with less than 1% yield in 2021. This ratio was 80% in 2020 and 37% in 2019. Compared to 2020, major changes took place in Canada, Italy, the United Kingdom and the United States. The figures also reflect around half of the fixed-rate bonds issued in the Euro area and in Japan, having been allocated in the primary market at negative rates.

It should also be noted that in 2021, the funding activities by some sovereigns were concentrated in the first half of the year. Combined with the gradual improvement in borrowing requirements and increased uncertainty and volatility induced by the repositioning of some investors on the long end of the yield curves, this prompted some issuers to reduce their issuance activity in the second half of the year (Annex A). In some Euro-area countries, the start of disbursements from the European Commission to European countries in the summer also played a role in the reduction of government borrowings compared to planned issuance activities (Box 1.1).

Figure 1.5. Volume share of fixed-rate bond issuance by yield category

Looking ahead, financial conditions are likely to tighten further, whether because of central banks continuing to normalise monetary policy or because investors demand higher yields given the economic and inflation outlook. The pace and timing of monetary policy normalisation will be closely watched by investors, who aim to assess risks and opportunities to determine optimal asset allocations. When surveyed, most countries in the OECD expressed little concern over the adequacy of investor demand.6 That said, if inflation outcomes surprise on the upside and inflation expectations drift up substantially, central banks around the world could be forced to accelerate planned normalisation by increasing policy rates earlier and faster than expected. In turn, this could lead to a substantial repricing in financial markets (OECD, 2021[2]). In this context, even the most liquid government securities markets may come under pressure as investors become more sensitive to changes in macroeconomic uncertainty.

1.3.1. Central bank purchases of and demand for government securities

In the wake of the pandemic, asset purchase programmes have been effectively used by a number of central banks, both to restore market functioning at the initial stage of the crisis and then through to support the economic recoveries. The asset purchases, which have been concentrated in government securities, reached unprecedented levels in several countries. Total net purchases of government securities by major central banks reached USD 4.6 trillion in 2020, moderating to USD 1.3 trillion in 2021 (Figure 1.6). These figures equate to 52% and 17% of long-term debt securities issuance by central governments of these countries in 2020 and 2021 respectively. As a result, in 2021, they remained as the single largest creditor in most OECD countries by holding around 45% of the outstanding stock in Japan and Canada, more than 35% in Australia and New Zealand, and the United Kingdom and more than 20% in most of the EU countries, Sweden and the United States.

Figure 1.6. Central banks’ net purchases and government debt issuance in selected countries

The accumulation of bonds through large scale asset purchase programmes has lowered the ‘free float’ of available government securities to the market and to some extent helped the absorption of additional supply of government securities. Through asset purchase programmes, central banks have lowered the interest rates on bonds and facilitated market functioning by acting as a ‘backstop’ buyer. While supply of government bonds has surged in the wake of the pandemic, the presence of a large, solvent, predictable and persistent buyer has helped primary dealers (PDs) with their market-making activity in terms of research cost and holding larger inventories.7

As the economies have rebounded and inflation concerns built up, a number of central banks began to normalise policy. Several central banks have already stopped net purchases and some either signalled their intention to start, or starting to implement balance sheet reduction since 2021, which, all things equal, increases the net supply of these bonds.8 This means that their holdings as a proportion of total government bonds outstanding are expected to only decline gradually.

Looking forward, the unwinding of asset purchase programmes would be expected to put some upward pressure on bond yields, although the extent of this pressure would depend on the pace and scale of the unwind. This increase should come primarily through the portfolio balance channel, as the increased net issuance will have to be absorbed by other investors who may demand higher yields. Depending on how the unwinding of the programmes are structured, there may also be a signalling effect if market participants infer that balance sheet reduction carries information about the future path of policy rates. Finally, central banks’ reduced level of activity could increase primary dealers’ search costs, which would increase their risk premia to intermediate trade.

While central banks have helped to absorb the additional supply of government securities in the market in major advanced economies, the balance sheet capacity of primary dealers may need to be assessed more carefully in planning governments’ funding. Overall, government securities market resilience will depend on various factors including Primary Dealers’ warehousing capacities, market absorption of additional bond supply and the pace of central banks’ tapering and unwinding of their balance sheet.

1.4. Risk-driven borrowing strategies resulted in an increased the amount of duration supply to the market

The primary objective of sovereign debt issuers is to ensure government financing requirements are met at all times and at the lowest possible cost over the medium to long run, consistent with a prudent level of related risk. This well-defined objective requires a number of supply (i.e. Issuer) and demand (i.e. Investor) factors to be considered by sovereign DMOs when setting borrowing strategies. These include i) cost and risk features (e.g. interest rate, refinancing, liquidity and currency risks) of the existing debt portfolios; ii) projections of the government borrowing needs; iii) potential medium- and long-term outcomes of a range of alternative funding strategies in terms of cost and risk parameters; iv) expert judgement on market constraints (e.g. investor demand, market development, legal restrictions etc.) and v) potential market challenges and opportunities, taking not account the potential for sovereign debt operations to impact home markets (OECD, 2018[5]). Depending on these factors, countries’ borrowing strategies, in terms of maturity, interest rate and currency composition of borrowings, evolve over time.

As discussed in the following sections, overall T-Bill issuance has been reduced and most sovereign issuers have shifted towards fixed-rate issuance with long-term maturities, which represented more than half of securities in their funding programmes in 2021. Sovereign debt managers are targeting a similar strategy in 2022, looking to further strengthen the resilience of sovereign debt portfolios to refinancing risks.

1.4.1. Reduction in T-bill issuances: A shift from money market funding to capital market funding

In normal times, short-term debt such as T-Bills act as a cash management instrument, whose issuance volume is determined by the timing and size of government receipts and outlays. During crisis periods, such as the 2008 financial crisis and the recent COVID-19 crisis, T-Bills play an important role as ‘shock absorbers’ in sovereign financing.9 When there are unexpected changes in financial requirements, sovereign debt managers can delay adjusting debt issuance rates during the year, typically through changes in the issuance of T-bills. At the onset of the COVID-19 crisis, sovereign issuers in many OECD countries (e.g. France, Germany and the United States) expanded their short-term borrowing programmes to manage unexpected surges in financing needs, this was achieved at a low cost in volatile market conditions (OECD, 2021[6]). T-bill issuance is also a complement to running down cash buffers in many circumstances and together these measures can offer substantial operational flexibility to debt managers. After rising rapidly in 2020, T-bill issuance has fallen notably over the course of 2021. The share of short-term instruments in central government marketable debt issuance in the OECD area, fell from 47% in 2020 to 41% in 2021, returning to pre-COVID-19 levels.

Figure 1.7. Maturity composition of central government marketable debt issuance

This strategy, shifting from money market to capital market funding aims to rebuild contingency capacity if significant funding is needed again in short order. There are also country specific factors behind this development. For example, in the United States, part of the decline in T-bills in 2021 was related to the constraints driven by the legislated debt ceiling. The US Treasury paid down T-bills to avoid exceeding the debt limit imposed in August 2021 (US Treasury, 2021[7]).10

It should be noted that a few countries including Germany and Mexico issued more short-term debt in 2021 compared to 2020, largely due to increased actual borrowing needs during the year compared to the original funding plans. In addition, relatively higher yields on long-term debt might also reduce the incentive for DMOs to issue at the long end of the yield curve.

1.4.2. Overall borrowing maturities lengthened at relatively low interest rates

As discussed in the previous section, new funding requirements were lower in 2021 relative to 2020 for most OECD countries. This has meant less emphasis on issuing short-dated instruments where domestic demand is more predictable and allowed sovereign issuers to issue more mid- to longer-dated bonds. The previous edition of this publication emphasised the rising rollover ratios and refinancing risk of debt portfolios and recommended sovereign DMOs consider lengthening borrowing maturities. It was noted that the low interest rates environment provides an opportunity for sovereign issuers to issue long maturity bonds to lower portfolio vulnerability from increases in interest rates for future generations. At the same time, any changes in borrowing strategies with respect to maturity composition should carefully consider investor demand, as different government securities have different roles in financial markets (e.g. T-Bills play a key role in money markets).

The 2021 OECD Survey on Primary Market Developments revealed that 21 out of 34 respondents lengthened their borrowing maturity structure relative to 2020, this was on the back of strong investor demand for duration. A number of OECD countries increased the volume of long-dated securities relative to short-term debt which, in turn, increased the weighted average maturity of the borrowing. For example, Canada increased its long-term bond issuance (maturity of 10 years or more) to above 40% of total bond issuance and re-opened its 50-year bond twice in 2021. Similarly, the average weighted maturity of debt issuance of the United Kingdom, skewed towards long-dated debt (maturity of 15 years or more) issuance, rose by around 18 months to 16 years at the end of 2021.

1.5. Increased refinancing needs has created scope for introducing new securities and maturity lines

When sovereign DMOs introduce new securities, they must consider a set of supply and demand side factors. In particular, they assess the strength and sustainability of investor demand, potential impact on existing securities, additional costs due to novelty and liquidity premia, and potential benefits of portfolio diversification and risk reduction, investor diversification and supporting the development of a new market segment (OECD, 2021[6]). Against this background, elevated funding needs after the COVID-19 crisis created additional scope for new maturity lines and new types of securities and allowed countries to introduce these new products without diminishing market liquidity, either in general or for particular parts of their yield curves. Compared to pre-pandemic period, the number of new instruments introduced by OECD area DMOs has increased significantly in recent years. The annual OECD Survey of Primary Market Developments seeks information from DMOs on their issuance of new securities in the form of new maturity lines and new type of instruments. The surveys in 2018, 2019, 2020 and 2021 revealed that, while only 25 new instruments were introduced during the 24 months leading up to the pandemic, this number increased to 46 after the pandemic hit (Figure 1.8).

In 2021, all new instruments except two carried longer-term maturities (i.e. longer than 2-year or more). A few countries extended their yield curves with inaugural issuance. For example, New Zealand extended the nominal curve from 20-years to 30-years, Sweden to 50-years, and Slovenia to 60-years in 2021. Introducing new securities with long-term maturities helps mitigate refinancing risk and diversifies the investor base by generating additional demand from available domestic and international savings pools. At the same time, any new instrument should be assessed prudently, as it would represent value-for-money for the taxpayer, enjoy strong and sustained demand in the long-term and be consistent with governments’ wider fiscal objectives. A good example of this is sovereign ESG-labelled bonds, in particular green bonds.

Figure 1.8. Issuance of new securities and maturity lines

1.5.1. Green bonds are becoming an integral part of regular issuance programmes in a number of countries

As a growing number of sovereign DMOs are incorporating ESG factors in public debt management and ESG-labelled sovereign bonds, in particular green bonds, look to become an integral part of regular issuance programmes (Box 1.2). As of December 2021, 18 OECD countries issued green bonds exceeding USD 180 billion, more than half of which were issued following the COVID-19 crisis. In terms of debut issuance, Chile, Luxembourg and Slovenia issued new sustainable bonds, and Columbia, Italy, Spain and the United Kingdom issued green bonds for the first time in 2021. In addition, 16 countries plan to issue a new ESG-labelled bond within the next 12 months, including the inaugural green bond issuances planned by Austria, Canada, Iceland and New Zealand.

In the wake of the pandemic, both the number and volume of ESG-labelled bonds issued in foreign currency have risen. In the OECD area, the share of foreign currency denominated borrowing in total long-term borrowing from the markets increased from 2.1% in 2019 to 2.5% in 2021 driven mainly by ESG-labelled bonds issued by a few countries including Chile and Hungary. For example, in Chile, the share of FX-denominated bonds increased from 17% in 2019 to over 65% in 2021. In these countries, the average term-to-maturity (ATM) has lengthened considerably due to the issuance of FX-denominated bonds. In addition, this strategy of complementing funding programme with international issuance, has helped reduce pressure in local bond markets and reduce financial crowding out risks, in particular in times of elevated funding needs (Priftis and Zimic, 2021[8]).

Box 1.2. Common approaches to incorporating ESG considerations into public debt management

Public debt management (PDM), as an interface between government and financial markets, can play an important role in supporting a government’s ESG agenda and in meeting ESG-sensitive investor demand. Common approaches to incorporating ESG factors into public debt management include conveying a government’s commitment to improving environmental and social outcomes and issuing ESG-labelled bonds while paying close attention to transparency and long-term financial sustainability. Such practices have been spreading rapidly among OECD countries in recent years in line with increased efforts to address the dual challenges of the COVID-19 pandemic and climate change. The 2021 Survey on Approaches to Incorporating ESG Factors into Public Debt Management revealed that half of the OECD area debt management offices (e.g. Australia, Chile, France and Germany) take into account the national-level ESG strategy either in their investor engagement, communication practices and/or their instrument choice. The trend is set to accelerate as one-fifth of the respondents are planning to implement similar practices in the near future.

Factoring the government’s ESG policies into investor relations and general communication strategies, by gathering the relevant information available (similar to a ‘one-stop-shop’ model), would make it easier for ESG-sensitive investors and rating agencies to assess risks and make investment decisions based on policy commitments. This, in turn, can help DMOs to better understand investors’ decision frameworks for asset allocation, promote awareness about governments’ ESG policies, identify a relevant green/other ESG bonds framework, and boost ESG credentials for an upcoming labelled bond issue launch. As of 2021, 12 OECD countries reported that they have aligned investor relations with a broader national level ESG strategy and several others are considering doing so. While many respondents noted the extent of incorporating ESG factors into their investor relations is relevant to the issuance of labelled bonds, a few DMOs that do not issue and do not intend to issue such bonds have also adapted their investor engagement to the growing demand for information in this area. The Australian DMO, for example, provides information and data on the Australian Government’s Climate Change and emission reduction policies and commitments, information on the government’s emerging technology and renewable energy programs as well as links to the relevant departments in a regular investor chart pack. Another prominent example comes from the Finnish Treasury, which launched a digital hub on the country’s ESG strategy, thus providing a single-entry point for investors to track where the country is standing in terms of various ESG related indices, government level targets and performance.

Labelled bonds such as green, social, sustainability and sustainability-linked bonds, that have specific sustainability and ESG objectives have gained ground in the government bond markets in recent years, on the back of robust market demand. Eighteen OECD countries have issued ESG-labelled bonds, mostly in the last two years. Alignment with national level ESG strategies and increased demand from investors are the main motivations for starting a sovereign green/ESG bond issuance programme. Respondents also noted the following challenges: i) lack of eligible projects; ii) identification of eligible budget expenditures; iii) setting a framework for green bonds, and; iv) impact reporting including underlying granular data for sector specific metrics. While an emerging field, leading practices to date of sovereign ESG-labelled bonds (e.g. France, Germany, Italy and the Netherlands) share the following common features: i) stake holder engagement through the lifetime of the bonds from selecting eligible projects to monitoring and reporting the projects, ii) commitment to transparency and reporting disclosures with regard to the types of projects in which funds will be invested as well as the areas of spending to be excluded, iii) commitment to sustain liquidity through issuance volume and instrument design.

Source: 2021 Survey on ‘Approaches to incorporating ESG factors into public debt management’ and discussions in 2021 annual meeting of the OECD WPDM.

1.6. Countries are emerging from the crisis with more debt, while strong growth helps stabilise debt burdens

Public debt sharply increases following wars, economic disasters, financial crises, and other events in which government outlays increase at rates in excess of revenues. In recent history, the 2008-financial crisis and the Euro-area debt crisis that followed pushed up government debt levels significantly and relatively quickly. Between 2007 and 2012, the outstanding volume of central government debt increased by around 70% from around USD 21 trillion to USD 35 trillion in the OECD area. In this period, central government marketable debt-to-GDP ratios increased by around 25 percentage points in total and by 8 percentage points in 2009 alone (Figure 1.9). In the years preceding to the pandemic, debt growth was offset by positive GDP growth-interest-rate differentials, which resulted in a small decline in the debt-GDP ratio for the OECD area (i.e. by 1 percentage point). However, the pandemic hit OECD countries hard in 2020, and led to an unprecedented impact on fiscal balances. While fiscal balances deteriorated by around 10% of GDP, the OECD-area economy contracted by 5.5% in 2020. A combination of rising fiscal deficits and contracting economies pushed government debt-to-GDP ratios by around 16 percentage points, up nearly twice the impact of the 2008 financial crisis.

Figure 1.9. Marketable debt-to-GDP: 2008 financial crisis vs COVID-19 shock

In 2021, while government debt continued growing in nominal terms, the central government marketable debt-to-GDP ratio is estimated to have fallen by around 2 percentage points for the OECD area. This decline was due to favourable growth-interest rate differentials generated by fiscal and monetary support provided in the wake of the pandemic and the strong rebound that generally followed economic re-openings. This outcome slightly bettered our 2020 forecast for 2021, largely due to the stronger-than-expected economic recovery. This also highlights that with the right policy mix, debt dynamics can be improved and put back on a sustainable path.

OECD level aggregate figures hide considerable variation across countries. Figure 1.10 illustrates that while debt-to-GDP ratios deteriorated from 2019 to 2020 across the OECD area, the impact of the pandemic on debt ratios was particularly significant for some countries including Canada, Italy, Japan, Spain, the United Kingdom and the United States. Compared to 2020, debt ratios in 2021 improved for the most part in the OECD area, except for a few countries, including Austria, Chile, and New Zealand. This largely reflects the uneven economic recovery across the OECD area and different size of continued fiscal support measures in 2021.

Figure 1.10. Changes in selected central government debt-to-GDP ratios across the OECD (percentage point changes between 2019-20 and 2020-21)

The 2021 survey on the sovereign borrowing outlook projects the outstanding level of central government marketable debt to increase from around USD 50 trillion in 2021 to USD 53 trillion in 2022 (Figure 1.11). This represents a total increase of more than USD 13 trillion in outstanding government securities since the outbreak of the COVID-19 crisis, which is higher than the total debt growth over the decade before the crisis. For the OECD area as a whole, the debt-to-GDP ratio is projected to decline marginally from 90% in 2020 to 88% 2022, largely driven by stabilised borrowing needs and low interest payments.11 It should also be noted that these projections were made prior to the war in Ukraine, which is expected to hinder the European economies, particularly those that have a common border with either Russia or Ukraine (OECD, 2022[1]).

As countries emerge from COVID-19 with greater debt loads, long-term debt-to-GDP trajectories will very much depend on the interplay between fiscal primary deficits, interest rates and long-term economic growth. In the ongoing recovery phase, when infections have been brought under control, it is important to channel fiscal support toward boosting investment. Encouragingly, in many countries public investment is projected to increase in 2022-23 relative to 2019 levels, though by a relatively modest amount (OECD, 2021[2]). This, in turn, would support debt sustainability by leading to stronger medium- and long-term economic growth and a gradual reduction of debt-to-GDP ratios.

Figure 1.11. Central government marketable debt and fiscal balances

Box 1.3. Definitions and concepts used in the Sovereign Borrowing Outlook Survey

The 2008 financial crisis had important implications for sovereign funding, debt levels and the composition of the debt stock. It brought sovereign debt operations to the forefront and highlighted the need for greater transparency provided by granular data on relevant metrics such as outstanding debt, redemptions and funding plans (OECD Sovereign Borrowing Outlook 2009 and OECD Sovereign Borrowing Outlook 2012). Investors and other stakeholders need to understand the current risk exposure of central government debt, future funding needs and debt strategies. They also require a breakdown of these metrics by instruments, maturity and currency types. To address this information need, the OECD Working Party on Debt Management (WPDM) launched the first survey in 2009 following significant consideration of the possible advantages and disadvantages of the different coverage of entities and instruments and the different ways to value them.

The survey collects gross borrowing requirements, redemptions and outstanding debt amounts. It provides breakdowns of these items by maturity, currency and interest rate types. It uses the core definition of sovereign debt, so-called central government marketable debt, mainly due to its comparability and collectability. This measure, directly linked to central government budget financing, enables the OECD to collect actual historic data and estimates of future government borrowing requirements and funding strategies. It provides detail on outstanding debt by instrument, maturity and currency. This is a narrower definition than the general government definition which is used, for example, by the OECD System of National Accounts (SNA) and consists of central government, state and local governments and social security funds controlled by these units.

In terms of debt instruments, the Borrowing Outlook Surveys and the results in this publication focus on marketable debt, as OECD governments are financed predominantly by marketable debt instruments (i.e. financial securities and instruments that can be bought and sold in the secondary market). It should be noted that most government debt statistics (e.g. OECD SNA, EU Maastricht debt, and IMF Public Sector Debt Statistics) cover marketable and non-marketable debt. An advantage of using this publication’s definition is to indicate to investors which instruments are available for trade in the secondary market, and for the issuers to calculate different characteristics of the debt, such as duration or time to maturity.

Change in methodology in aggregating survey data

The original methodology set in 2009 used the assumption of fixed exchange rates (as of 2009 values) to aggregate data across the different national currencies in the OECD area. This assumption was adopted for comparability reasons. The strength of the US dollar over the period, however, has resulted in material differences that complicated interpretation of the results (Figure 1.12). Considering this caveat, the OECD WPDM decided to adopt a flexible rate methodology in reporting the survey results in 2021. To this end, this edition of the Outlook presents the survey data converted all annual figures based on the end of year (31 December) local to USD rate in that year.

Figure 1.12. Central government marketable debt considering different exchange rate assumptions, 2021 estimates.

1.6.1. Interest cost on government debt declined despite greater debt

Despite the surge in government debt in the wake of the COVID-19 crisis, interest cost on debt continued to fall in most countries due to the low level of interest rates. Figure 1.13 illustrates the percentage of government interest expenditure in GDP from 2007 to 2021. Interest expenditure in relation to GDP in this period fell by more than 50% in 16 countries (including Canada, France, Germany and Sweden) during this period. Even countries with large debt stocks and borrowing needs including Italy, Japan and the United States registered decreases in interest expense-to-GDP ratios. In 2021, only six countries (i.e. Australia, the Czech Republic, Hungary, New Zealand, Norway and the United Kingdom) have seen slight increases compared to 2020.

As economies emerge from the pandemic, interest rates are expected to rise. This means that refinancing maturing debt will occur at higher rates. In this regard, fiscal policies will need to consider the potential for additional interest burdens in future budgets. It should also be noted that a temporary rise in bond yields would only have a limited impact on overall debt servicing costs. Though, any sudden shifts in sentiment and perceptions of sovereign risk not necessarily related to long-term solvency, may lead to a deterioration in credit spreads, and even an interruption of market-based borrowing as seen during the 2010-12 European sovereign debt crisis (OECD, 2019[9]).

Figure 1.13. General government interest expenses in relation to GDP

1.6.2. Despite the increased ATM, refinancing risk exposure remains challenging

Sovereign issuers in many OECD countries have expanded their short-term borrowing programmes to manage unexpected surges in financing needs in the wake of the COVID-19 pandemic. The share of short-term instruments (i.e. maturity less than 12-months) in outstanding central government marketable debt in the OECD area, which averaged 10% in the past five years, increased to 16% in 2020 (Figure 1.14).

This 2021 edition of this publication highlighted that in view of the rapid pace of debt accumulation and favourable funding conditions, rebalancing of sovereign debt portfolio maturities should be considered to ease near-term redemption pressures and strengthen the resilience of the debt portfolio against refinancing risk. A lengthening of government debt portfolio maturities may also facilitate a smooth exit of expansionary monetary policies and mitigate the budgetary impact of interest rate increases. With a lengthened ATM, this rise will be slowly passed on to debt service costs and help to avoid endogenous debt accumulation.

Figure 1.14. Maturity structure of central government marketable debt

Since 2021, sovereign funding strategies in many countries have been modified to mitigate refinancing risk by lengthening issuance maturities. In the OECD area, the share of long-term instruments in the outstanding government marketable debt increased from 84% to 88% in 2021, but remained lower than pre-pandemic levels. It should be noted that central bank quantitative easing programmes have implications for maturity extension efforts, given that central banks often buy government bonds and fund them with central bank reserves which pay interest at the deposit rate and are characterised as floating rate liabilities. In this respect, an extension of debt maturities has been partially offset by central bank bond purchases in those countries, where national central banks launched large quantitative easing (QE) programmes. Going forward, that impact is expected to diminish as central bank balance sheets get smaller (as bonds mature).

In addition to the maturity structure of debt stock, the ATM of outstanding debt returned to pre-pandemic levels in most countries. From a risk management perspective, the higher ATM and duration figures imply a lower pass-through of interest rate changes to government interest costs and enhanced fiscal resilience. After a cumulative increase of 1.6 years since the 2008 financial crisis, the ATM for the OECD area declined slightly from 7.66 years in 2019 to 7.36 years in 2020. As a result of extended maturities in 2021, the ATM of outstanding debt standing at 7.63 years has almost fully returned to pre-pandemic levels and reached record highs in 16 OECD countries including France, Italy, Portugal, Spain and the United States (Figure 1.15).

Figure 1.15. Average term-to-maturity of outstanding marketable debt in selected OECD countries

An important aspect of a governments’ medium-term debt strategy is related to the percentage of its debt to be refinanced (i.e. rollover) in the medium-term. Figure 1.16 presents redemption profile of central government marketable debt for the next 12, 24 and 36 months. As of December 2021, total debt maturities for OECD governments over the following 36 months is 42% of the outstanding marketable debt. The rollover ratio for the next 12 months is 22%, which is slightly lower than the previous year’s estimates of 25% but remain higher than pre-pandemic levels of 20%. Among the country groups, G7 countries, where economic flexibility and access to deep and liquid financial markets ease market perception of refinancing risks, have the highest ratios.

Figure 1.16. Redemptions of central government marketable debt in OECD country groupings, as a percentage of debt stock

For a given maturity structure, an increasing outstanding amount of debt means increases in the amount of debt to be refinanced. In terms of absolute levels of debt to be repaid or refinanced, the aggregate redemption amount for the OECD area as whole in the next three years has also slightly declined (i.e. around USD 20 trillion) compared to 2020, even though it remains higher than pre-pandemic levels. The high level of the observed debt redemption profiles is expected to persist, largely due to the increasing refinancing burden from the maturing debt, combined with continued budget deficits in most OECD countries. In this regard, OECD DMOs should continue taking a prudent approach towards managing short- and long-term refinancing risks. Such strategies might include smoothing the cash flow profile of upcoming maturities, reducing pressure on the Treasury bill segment, and rebuilding contingency capacity. As shown by the key refinancing risk indicators, many OECD debt managers have already begun to extend issuance structures by increasing the share of long-term debt issuance and consider introducing new maturity lines and new instruments (e.g. Italy, the United Kingdom and the United States). These debt management considerations are taken against the backdrop of rising interest rates and elevated debt to GDP ratios, as they aim to enhance fiscal resilience by seeking to mitigate refinancing risk.

Refinancing risk is particularly important for sovereigns with high debt redemption profiles and/or relatively limited access to deep financial markets. In times of market turbulence, sovereigns with weak fundamentals are more vulnerable to spikes in borrowing rates, while “safe havens”, such as Germany and the United States, experience the “flight to safety” phenomenon which can translate into lower borrowing costs and greater demand. The last few decades provide ample evidence of this phenomenon. In view of tightening global liquidity conditions, sovereign DMOs of the countries with weak fundamentals should take a more cautious approach in managing refinancing risk.

1.7. Implications of the pandemic for future debt management

1.7.1. Key debt management lessons from the COVID-19 crisis

An overview of the effectiveness of the borrowing strategies and risk management approaches used during crises is important in terms of applying them to other countries and keeping them available at other times. Members of the OECD’s Working Party on Debt Management shared their thoughts and practices on various aspects of debt management in 2021. They underlined that the main difference between ‘normal ‘times and ‘periods of crisis’ is that DMOs need to meet rapidly changing borrowing needs, often in more volatile market conditions. In this regard, the COVID-19 crisis was not an exception in terms of greater need for cash management flexibility. The need for cash management flexibility is met with short-term borrowing and contingency buffers, two important tools used effectively by some countries during the 2008 financial crisis. Most OECD countries initially handled the COVID-related funding needs with short-term funding and then gradually adjusted the borrowing towards longer-term funding (e.g. Australia, Canada and the United States).12 In recent years, several countries, including Germany and Italy, have started (or widened) their repo activity to improve cash management, provide more flexibility in issuance plans and support market liquidity. The 2021 Survey on Primary Market Developments indicates that several DMOs including Austria, France, Portugal and the United States benefited from liquidity (cash) buffers in the wake of the pandemic, which were used primarily to mitigate unexpected variations in borrowing needs during the initial acute phase of the COVID-19 crisis (OECD, 2021[6]).

In addition to maintaining access to short-term funding markets and contingency buffers, the crisis also underlined the importance of having different borrowing methods (auction, syndications, and private placements) in place. For example, syndications are assessed as useful when price making is relatively challenging in difficult market conditions, or when large single volume issuance is required and a syndication will reduce execution risk. The number of countries using private placements and syndications has been at similar levels for many years (i.e. around two-thirds of OECD countries use syndications, and a quarter use private placements).13 Discussions during the annual meeting of the WPDM revealed that their use has become more frequent or that there have been increases in volumes issued this way in recent years.

Figure 1.17. Key lessons learned from the COVID-19 crisis

Looking ahead, many countries have large maturities to roll-over and will maintain large auction sizes in 2022 compared to pre-pandemic levels. Taking both into consideration, funding activities have become more sensitive to market developments, while monetary policy is becoming less supportive. Financial conditions have already tightened modestly, which implies that maturing sovereign debt in coming periods will gradually be refinanced at a higher cost. Going forward, downside risks to the outlook include the emergence of new COVID-19 variants, persistent inflation (which could quickly lead to higher and more volatile yields), and mounting geopolitical tensions. The sensitivity of debt servicing costs to interest rate risk might be heightened in case of sudden and sharp rises in market rates. In the short to medium term, rollover risk may emerge as a key policy concern for debt managers, in particular in countries with – perceived – debt sustainability problems, where sudden shifts in sentiment can lead to sharp increases in borrowing costs and even temporary and periodic loss of market access. In the long run, public debt levels are vulnerable to risks to future public finances, including population ageing, climate change, low growth and high levels of inequality. Without credible and transparent fiscal frameworks, these risks can further undermine fiscal balances and raise debt sustainability concerns (Rawdanowicz et al., 2021[10]).

In terms of funding conditions, a number of risk factors could add pressure, including rising inflation expectations and divergent recoveries between advanced and emerging market economies. It should be noted that, in some cases, political and geo-political factors (e.g. elections and the tensions over Ukraine) may contribute to stressed market conditions. Further, as central banks begin to normalise monetary policies, both through higher policy rates and reduced (or ceased) asset purchases, market liquidity may become fragile and affect sovereign funding.

Secondary market liquidity for government bonds, including repos, is an important contributing factor in supporting primary market access and minimising sovereign borrowing costs over time. To ensure the smooth functioning of government securities markets in the coming periods, debt managers should attach greater importance to i) close monitoring of the resilience of market intermediaries; ii) strengthening investor relations and co-ordination among authorities; and, iii) being a regular and transparent issuer.14 In the event of an illiquidity concern, a security lending facility (SLF) can be used effectively for closing the demand-supply gap for individual securities and preventing settlement fails to a large extent. SLFs are one of the tools typically used by central banks but also offered by several debt management offices in the OECD area.15 Lastly, given the uncertainties around fiscal outcomes, debt managers need to remain flexible if borrowing needs change materially and at relatively short notice.

1.7.2. Higher inflation and implications for government debt

Given the muted inflation pressures experienced by most countries over the past decade, inflation was not a concern for investors before the pandemic. Hence, the inflation risk premia on conventional government bonds was relatively low, in line with the expectations of investors who viewed the outlook for inflation as benign. With the global economic recovery and impact of the war in Ukraine, supply-chain bottlenecks and sharp increases in energy prices, short-term inflation is projected to be higher than it was prior to the pandemic in many countries. Inflation in the OECD area surged to 6.6% in the 12 months to December 2021, reaching the highest rate in three decades. After peaking at the turn of 2021-22, the OECD projects annual consumer price inflation to stabilise to around 3% in the OECD area by end-2023 (OECD, 2021[2]). This turnaround is sharp and rising inflation (in outcomes and expectations) has implications for the value of public debt and demand for inflation-linked bonds.

An upward inflation shock reduces the real value of a government’s outstanding debt. Overall, the impact of the inflation shock depends on several factors, including the average maturity of the debt portfolio, the share of fixed rate debt, and actual inflation compared to market expectations. The higher the average maturity of debt held by the private sector, and the proportion of fixed rate debt, the higher the impact of inflation on reducing the real value of debt. It is important to highlight that inflation is stochastic, and that investors will take inflation risk into account when pricing and choosing to hold government debt.16

A stronger case for inflation-linked bonds

With rising inflation the demand for inflation-linked bonds typically increases, because they offer a direct hedge against inflation. Traditionally, institutional investors, such as pension funds, with liabilities that increase with inflation are natural investors in such securities. Despite the reduction of observed break-even inflation rates before the pandemic, the demand from such investors for inflation-linked bonds remained strong and supported the sustained supply. Inflation indexed debt makes up a meaningful portion of the debt stock for a number of sovereign issuers. For example, the United Kingdom stands out at around 25% inflation-linked debt as a percentage of total central government marketable debt, as defined benefit pension liabilities have embedded inflation indexation, and hence form a persistent demand base.17 In terms of the volume, the United States is the largest issuer with over USD 1.7 trillion of Treasury Inflation Indexed Securities (TIPS) outstanding.

In the OECD area, the pace of the issuance of inflation indexed bonds has slowed in the wake of the pandemic. The percentage share of inflation indexed debt issuance in total long-term debt issuance declined from 5.7% in 2019 to 4.2% in 2021, as sovereign issuers favoured fixed-rate long term securities in view of cost and risk considerations. As a result, the share of inflation-linked debt in outstanding long-term debt declined slightly from 8.8% to 8.0% between 2019 and 2021. Debt managers tend to exercise considerable flexibility over the amount of gross issuance allocated to inflation linked bonds because of the fact they comprise only a minor part of most long-term debt portfolios.

According to the recent surveys, sovereign issuers observe a growing investor demand for inflation-linked bonds, as inflation risk premia have risen in the current uncertain environment. This reflects a confluence of factors, including the perception that central banks have an increased tolerance for above target inflation, continued fiscal expansion, continued supply chain bottlenecks, and price pressures related to the climate transition. In addition, it was noted that short-dated inflation-linked bonds (e.g. 5-year and 10-year maturities) have attracted increased demand. In response to growing demand, a number of countries have begun to (or are considering) increase their issuance of inflation linked bonds (e.g. Czech Republic, France and the United States). Their percentage share of total borrowing is projected to increase from 4.2% in 2021 to 6.3% in 2022, thus the outstanding volume of inflation-linked bonds is expected to reach USD 4.5 trillion in 2022. Despite the increase in their issuance, their share in total long-term debt will remain lower than the pre-pandemic period of close to 9%.

1.7.3. Keeping an eye on digitalisation in bond markets

Technology in the financial sector is used to help automate existing processes and to increase operational efficiency. Major areas of application include financial advice and marketing services and, to a lesser extent, settlement and payment processes. Digitalisation in capital markets, which has been ongoing for several decades, accelerated in the wake of the pandemic. For instance, the pandemic has enhanced the shift to digital payments, in particular where the financial systems had been less developed (Auer, Cornelli and Frost, 2020[11]). In addition, it has contributed to the speeding up of work on the development of central bank digital currencies (CBDCs) (Auer et al., 2020[12]).

The widespread adoption of new financial technologies has substantial implications for primary and secondary government debt markets. In primary markets, a major application of digitalisation is the auction process. Electronic auction systems play an important role by making it easier for retail investors as well as institutions to bid directly in auctions (e.g. Italy and the United States). Automation of auction procedures increases their efficiency vis-à-vis the use of manual procedures, as it enhances speed, reliability and cost-effectiveness. In 2019, The European Central Bank launched a project called ‘European Distribution of Debt Instruments’ for consultation. The goal of this project is to provide Euro-area issuers with a single centralised process for debt securities issuance to harmonise issuance process and reduce intermediation costs.

More recently, experiments on issuance of digital bonds have been on the rise. Since their first trials in 2017, a number of bonds were issued as digital records by both private sector and international organisations (e.g. WB and EIB). Essentially, distributed ledger technology allowed the issuer to create, allocate, transfer and redeem a bond without a need for a central securities depositary (CSD) and a custodian. Digitalisation of securities may bring benefits to issuers including a reduction of operational costs and settlement time, and better market transparency. On the other hand, the lack of regulations, protocols and standards for digital securities, which are not yet accepted as financial securities in many countries, entails security concerns.

In the secondary markets, digitalisation has altered the ecosystem of government securities markets. Today, in several OECD countries (e.g. Italy, the United Kingdom and the United States), a considerable amount of trades – especially for on-the-run securities – are made through electronic venues. For example, in the United States, the inter-dealer market for Treasury securities is almost entirely electronic, with a large presence of Principle Trading Firms 18 (PTFs) that employ automated trading technologies. These advances supported market liquidity with quicker, safer and cheaper transactions, but may also cause less heterogeneous behaviour, leading to greater volatility. This underpins the concern expressed by sovereign debt managers about correlated trades in the government securities market. In view of financial stability implications, financial regulatory authorities should closely monitor new market structure developments and may wish to impose new training requirements on investors and traders to address these risks. As well, authorities should build their own internal capacities to better understand and oversee these risks. For example, recent studies on episodes of US Treasury market dysfunction during periods of stress highlight the importance of addressing anonymous trading on electronic interdealer trading through such means as the introduction of central clearing for these trading activities (Duffie, 2020[13]; G30 Working Group on Treasury Market Liquidity, 20221[14]).

Sovereign DMOs are not ‘first movers’ in terms of financial technology use. That said, before adopting any new technologies, they tend to wait to ensure that the entire market infrastructure, including the associated regulations, is well established and that various risks are mitigated properly. At the same time, they would benefit from diligent observation of digital transformation in financial markets to gain a deeper understanding of emerging risks, costs and opportunities that digitalisation is bringing to both debt issuance and trading processes.

1.7.4. Review of debt management strategies to improve resilience

The 2021 Survey on Primary Market Developments asked about plans to review the long-term funding strategy as a consequence of increased debt levels following the COVID-19 pandemic. More than a third of the respondents are considering reviewing long-term funding strategies because of increased debt levels following the COVID-19 pandemic (see Annex A for more detailed information).

The survey results indicate that a number of countries are considering changes in business continuity plans, investor relations and cash buffer practices. Lengthening maturities and issuance of new securities will also remain high on policy agendas. A review of issuance techniques, communication with central banks as major investors and primary dealership systems are being considered by some debt management offices.

Figure 1.18. Potential implications of the pandemic on public debt management

Adaption of business continuity plan to secure ability to perform critical functions at all times

The COVID-19 pandemic forced Debt Management Offices (DMOs) to switch to remote working very quickly, in line with national-level measures. Although pandemics per se were not amongst the business interruption scenarios in many OECD country DMOs (except Colombia, Ireland, Japan and Switzerland) before the pandemic, all included arrangements to ensure business continuity, which enabled critical functions such as funding and repayment operations to be successfully carried out remotely (OECD, 2021[6]). After three major outbreaks in less than 20 years (i.e. Sars, Mers and COVID-19) and assuming there will be others in the future, DMOs should give consideration to pandemic-related scenarios in their business continuity plans.

Remote working has become an operational risk management tool that is expected to form some part of the post-pandemic world as it provides flexibility in the workplace and allows essential services to continue without disruption. The 2021 Survey on Primary Market Developments revealed that more than half of the respondents plan to carry out at least some of their operations remotely as standard practice. In particular, payments, cash management operations and auctions are listed amongst the items that are considered to be candidates for remote management (Annex A). Managing “key person risk” should be an important component of these revisions. Cross-team training of more staff with critical skills through virtual classes and webinars to avoid “key person risk” (e.g. staff involved in cash market operations, derivative markets and debt repayments) can enhance the emergency response capacity of DMOs.

Cybersecurity is another area that requires constant attention from policy makers. Cyber-attacks on debt management offices may affect the timely delivery of government funding and repayment programmes. A number of sovereign DMOs have observed a change in the number and sophistication of cybersecurity threats to their organisation following the COVID-19 crisis, mainly driven by extensive use of digital tools and remote working practices. Despite the growing threat of cybersecurity events, both the number of incidents and the extent of actual damage have been limited in the OECD area to date, thanks to robust cybersecurity programmes in DMOs. To keep pace with evolving cyber risks, sovereign DMOs should regularly conduct business impact analysis and review incident management plans and enhance the situational awareness of likely cyber threats and vulnerabilities among the staff (OECD, 2021[6]).

More emphasis given to communication and investor relations

The pandemic forced sovereign issuers to change their communication format and strategy with investors, relevant government authorities and the general public. Almost a third of survey respondents noted a change in their market communication strategies since the pandemic (or at least a departure from past practice to accommodate the extenuating circumstances of limited travel and uncertain fiscal forecasts). DMOs have updated investors more frequently through digital communication tools (e.g. email distribution lists, publishing market notices on their websites, virtual meetings and phone calls) with a forward-looking but also more flexible approach. They have provided information through digital tools regarding funding news, changes in funding needs and plans in a cost-effective and timely manner. In addition, senior government officials (e.g. Ministers, treasury secretaries and heads of DMOs) have communicated actively on how they evaluate the developments and address the risks to ensure proper functioning of government securities markets (e.g. Canada). They have also put more emphasis on timely information sharing with fiscal and monetary authorities.

In terms of publications, DMOs are introducing more frequent digital publications in addition to the annual reports and quarterly financing plans. For example, New Zealand launched a regular e-newsletter to update investors regularly on funding activities and projections, and Portugal changed the format of its monthly e-newsletter to make the communication effort more targeted. Another example is the Australian DMO’s quarterly ‘investor insights’ series for wholesale investors, which aims to explain the thinking behind key parts of their operations and topics related to the Australian Government securities market. In terms of the content, ESG-related issues are becoming more visible in investor relations (e.g. Australia, Finland and the Netherlands). In particular, DMOs launching green bond programmes need to adjust their communication package and to weigh more emphasis on government’s environmental and social performance and projects more than in the past.

In order to ease access of information, some DMOs have emphasised the translation of key documents to the languages of major foreign investors. For example, the Australian DMO (Australian Office of Financial Management) provides investor presentations in Japanese. Similarly, the Hungarian DMO (AKK) provide green bond presentation in Japanese and Chinese to facilitate access to information by investors from different regions.

DMOs should continue exploring options for new products to add funding capacity. They should consider further diversifying their investor base, which supports increased certainty of access to funding markets over time, contributes to lower and less volatile yields for government securities, and provides flexibility to meet changing financial requirements. With the prospect of expected higher financing requirements in the coming years, a number of countries noted that there is room to introduce new securities and/or additional maturity segments (see Annex A for more detailed information). This should involve consultation with market participants to assess the market’s capacity for debt instruments with different maturities and interest rate structures. Regular consultations with market participants are an integral and valued part of the debt management process in most OECD countries. Country practices evolve over time to ensure all market participants have the opportunity to provide input (e.g. US Treasury and UK DMO have conducted and have published market consultations for new maturity lines/products). More recently, the Finnish Treasury launched a new process for selecting bonds to be auctioned, including requesting recommendations.

Investors should be informed of regulatory changes regarding government securities in a timely manner. A recent example is the new regulations on Collective Action Clauses (CACs) for government bonds introduced in the Euro area. The amendments to the Treaty establishing the European Stability Mechanism envisage that all new government securities issued by EU sovereigns with a maturity of more than one year will be issued with single limb CACs as of 2022 (ESDM, 2021[15]). Going forward, principles and regulations around sustainable finance will also be followed more closely both by issuers and investors. For example, impact reporting and external reviewers for green bonds, and the way Credit Rating Agencies (CRAs) incorporate ESG factors into their methodologies for credit ratings and outlooks may subject to regional regulatory changes.

An important part of emergency response activities is to communicate the changes in financing programmes to stakeholders, including the general public. In their role as regular and large issuers in securities markets (and therefore with a potential to impact markets), DMOs should carefully manage changes in borrowing programmes by balancing the need for transparency and predictability while allowing for sufficient room for manoeuvre. Risks to financing programmes especially when they occur prior to an auction, poses a challenge for transparency and predictability and could cause reputational damage if not well managed. To this end, sovereign debt managers should remain vigilant in monitoring market developments and market participants carefully and closely in case of an event risk. Additional communication with market participants may be required to convey changes in borrowing plans.

Uncertainties around economic recovery require strong co-ordination and communication with fiscal and monetary policy authorities. In particular, timely updates of cash flow forecasts are critical for sovereign issuers to identify the volume and immediacy of funding needs. This requires efficient communication channels between cash managers and their counterparts in spending and revenue collection agencies. At a time when market liquidity becomes more sensitive in financial markets, communication with monetary authorities regarding government cash balances and borrowing strategies, in particular with respects to debt redemption projections, and any change in cash buffer targets, could be critical in avoiding unnecessary pressure on market liquidity.

Improving flexibility through cash buffers

The recent survey on Primary Market Developments indicates that several DMOs including Austria, France, Portugal and the United States benefited from liquidity buffers in 2020 and 2021. Since the outlook remains highly uncertain, having emergency funding tools in place continues to be relevant for all sovereign issuers. Sovereign DMOs may benefit from adjusting their contingency funding tools, such as cash buffers for flexibility.

Almost all countries in the OECD area maintain a liquidity buffer (i.e. 35 countries). In the wake of the pandemic, almost all countries increased their target level of cash buffers. In 2021, cash management practices became more mixed as some countries emerged from the crisis faster than others. While some countries have not made any changes to target levels, some reduced compared to 2020 levels on the back of declining borrowing needs and uncertainties. For example, some DMOs including Australia, Finland, France, Portugal and the Netherlands increased their cash buffer following the crisis and then decreased it in 2021, as funding circumstances and market uncertainty eased.

Looking forward, it is important to maintain flexibility to be able to make – at least minor – adjustments to account for stressed market conditions, for example around the dates of major events announced after the issuance calendar (i.e. event risk). Sovereign issuers should consider national and major central banks’ monetary policy announcements, elections and major economic data releases when designing cash buffers, in addition to redemption profiles and large fiscal outlays. For example, some countries including Austria, France and Sweden will hold presidential elections while several others run legislative elections in 2022. Political developments are often assessed to have only a temporary impact on sovereign yields, with limited effects on sovereign borrowing programmes (OECD, 2018[5]). However, in the period leading up to election dates, with increased tensions, investors might become more concerned with uncertainties and reluctant to participate in funding activities. Lastly, for the Euro area, country mismatches between timing and size of the payments for and recipients from pandemic related NGEU programmes should also be factored in when setting targets for cash buffers.

Against the backdrop of a less favourable funding environment, debt managers should remain vigilant, and closely monitor the resilience of market intermediaries, and co-ordinate with the relevant authorities to quickly address possible stressed market conditions. Authorities may benefit from tools such as security lending facilities and contingency buffers to be able to absorb possible stress in markets and adjust the auction sizes over the year.

References

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Annex 1.A. Methods and sources

Definitions and concepts used in the Sovereign Borrowing Outlook Survey

The Borrowing Outlook survey collects gross borrowing requirements, redemption and outstanding debt amounts with breakdown of these items by maturity, currency and interest rate types. It uses core definition of sovereign debt, so-called central government marketable debt, mainly due to its comparability and collectability. This measure, directly linked to the central government budget financing, enabled the OECD to collect not only for realisations but also for estimates of government borrowing requirements, funding strategies as well as outstanding debt with instruments, maturity and currency types.

Coverage of institutions: Central Government

The coverage of institutions by debt statistics varies from public sector to central government. Public sector stands as broadest institutional coverage, as it includes local governments, state funds financial and non-financial public corporations as well as central government debt. General government definition, which is used by for example by OECD System of National Accounts (SNA), consists of central government, state and local governments and social security funds controlled by these units. Central government covers all departments, offices, establishments and other bodies classified under general government, which are agencies or instrument of the central authority of a country, except separately organised social security funds or extra-budgetary funds. In terms of layers of coverage of institutions, central government stands out as the core definition. Debt of central government is raised, managed and retired by the national DMOs on behalf of the central government. Hence, advantage of this relatively narrow definition of debt is that it enables countries to provide comparable figures, in particular for the estimations.

Coverage of types of debt: Marketable debt

In terms of instruments, liabilities can be in the form of debt securities, loans, insurance, pensions and standardised guarantee schemes, currency and deposits, and other accounts payable. Debt items can be classified as marketable and non-marketable debt. While marketable debt is defined as financial securities and instruments that can be bought and sold in the secondary market, non-marketable debt is not transferable. For example, bonds and bills issued in capital markets are marketable debt; multilateral and bilateral loans from the official sector are non-marketable debt.

The Borrowing Outlook survey focuses on marketable debt instruments, while most government debt statistics (e.g. OECD SNA, EU Maastricht debt, and IMF Public Sector Debt Statistics) cover both marketable and non-marketable debt items. OECD governments are financed predominantly by marketable debt instruments. This is a central definition for every analysis concerning various issues around debt management including borrowing conditions, portfolio composition, investor preferences and market liquidity. An advantage of using this definition is to indicate to investors which instruments are available for trade in the secondary market and which are not. Another reason is for the issuer to calculate different characteristics of the debt, such as duration or time to maturity, which in the case of non-marketable debt would present a difficult issue.

Terminology

Standardised Gross borrowing requirement (GBR) for a year is equal to net borrowing requirement during that year plus the redemptions on the capital market at the beginning of the same year. Also, the (estimated) cash balance may affect the funding needs. In other words, the size of GBR in calendar year amounts to how much the DMO needs to issue in nominal terms so as to fully pay back maturing debt plus the net cash borrowing requirement through any issuance mechanism.
Net borrowing requirement (NBR) is the amount to be raised for current budget deficit. While refinancing of redemptions is a matter of rolling over the same exposure as before, NBR refers to new exposure in the market.
The funding strategy involves the choice of i) money market instruments for financing short-term GBR and ii) capital market instruments for funding long-term GBR. The strategy entails information on how borrowing needs are going to be financed using different instruments such as long-term, short-term, nominal, variable-rate, indexed bonds and FX-denominated debt.
Gross debt corresponds to the outstanding debt issuance at the end of calendar years. This measure does not take the valuation effects from inflation and exchange rate movements, thus it is equal to the total nominal amount that needs to be paid back to the holders of the debt.
Redemptions refers to the total amount of the principal repayments of the corresponding debt including the principal payments paid through buy-back operations in a calendar year.

Regional aggregates

Total OECD area denotes the following 38 countries: Australia, Austria, Belgium, Canada, Chile, Colombia, Costa Rica, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
The G7 includes seven countries: Canada, France, Germany, Italy, Japan, United Kingdom and the United States.
The OECD Euro area includes 17 Member countries: Austria, Belgium, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Portugal, the Slovak Republic, Slovenia and Spain.
In this publication, from a public debt management perspective, the Emerging OECD group (i.e. OECD emerging-market economies) is defined as including seven countries: Chile, Colombia, Costa Rica, Hungary, Mexico, Poland and Turkey.
The Euro (EUR) is the official currency of 19 out of 28 EU Member countries. These countries are collectively known as the Euro area. The Euro area countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, the Slovak Republic, Slovenia and Spain.

Calculations and data sources

Estimates that are presented as a percentage of GDP, for consistency reasons, use GDP estimates from the last Economic Outlook in the previous year (so December 2021 for this publication) and are calculated using nominal GDP data.
Debt is measured as the face value of current outstanding central government debt. Face value, the undiscounted amount of principal to be repaid, does not change except when there is a new issue of an existing instrument. This coincides with the original promise (and therefore contractual obligation) of the issuer. DMOs often use face value when they report how much nominal debt will mature in future periods. One important reason for using face value is that it is the standard market practice for quoting and trading specific volumes of a particular instrument.
Currencies are converted into US dollars using flexible exchange rates using data sourced from Refinitiv. The effects of using alternative exchange rate assumptions (in particular, fixing the exchange rate versus using flexible exchange rates) are illustrated in Box 1.2 of this chapter and in Figures 1.3 and 1.4 of the OECD Sovereign Borrowing Outlook 2016.
All figures refer to calendar years unless specified otherwise.
Aggregate figures for gross borrowing requirements (GBR), net borrowing requirements (NBR), central government marketable debt, redemptions, and debt maturing are compiled from answers to the Borrowing Survey. The OECD Secretariat inserted its own estimates/projections in cases of missing information for 2020 and/or 2021, using publicly available official information on redemptions and central government budget balances. Where government plans have been announced, but not incorporated into financing plans as of end November, they are not included in the projections presented in this publication. Also the latest December estimates of government net lending in the OECD Economic Outlook database are used in estimating some missing data.
Both the 2021 OECD Survey on Primary Market Developments and the 2021 OECD Survey on Liquidity in Secondary Government Bond Markets were carried out in October 2021 and this date should be kept in mind when looking at responses to questions that ask for information about the previous or the next 12 months.
Yield group debt calculations in Figure 1.5 are based on all issuances and re-openings of fixed-rate bonds (i.e. data excludes: short-term instruments, indexed linked, floating rate instruments and strips) and for comparability reasons only bonds issued in EUR, USD, Japanese Yen, Canadian dollars and British pounds were chosen. Data is sourced from Refinitiv.

Average term-to-maturity (ATM)

The following notes were provided by countries in relation to their calculations of average term-to-maturity.

Annex Table 1.A.1. Average term-to-maturity country comments
Country	Note
Australia	Weighted ATM calculation includes Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. Security weightings are based on the face value of each instrument.
Chile	All marketable debt in Chile corresponds to Bonds. All calculation as of 31 December of each year. Some of them consider amortisation with maturity 1 January of the following year
Colombia	The ATM of Colombia debt stock corresponds to domestic bonds (TES), foreign bonds and, multilateral and bilateral loans.
Costa Rica	It is important to consider that ATM includes: all the Internal debt and only Eurobonds to External debt.
Czech Republic	Marketable central government debt excludes savings government bonds (retail bonds).
Denmark	Excludes effects from swaps and other derivatives.
Estonia	Includes central government marketable debt only, excludes other levels of government.
France	Excludes swap effects
Germany	Calculation excluding holdings in own stock. Inflation-linked securities weighted with 0.75.
Greece	The mentioned data refer to Long Term marketable debt securities (more than 1 year original maturity) and exclude Treasury Bills.
Hungary	Data excludes retail securities, locally issued FX bonds, loans and since 2020 also excludes the non-marketable bonds issued to municipalities. Data includes cross-currency swaps.
Iceland	Excludes swap effects.
Ireland	The estimated ATM for Ireland reflects bonds, Euro Commercial paper and Irish Treasury Bills. Inflation linked bonds and some ultra-long maturity notes issued since 2016 are excluded on the basis that they were issued as private placements. These products account for less than 2% of Gross National Debt outstanding at end-2021.
Israel	ATM data excludes retail bonds and non-tradable bonds for pension funds and insurance companies
Italy	No security has been excluded; swap effects are excluded. For 2021 Please note that loans SURE/NGEU (which would raise the 2021 ATM figure to 7.2), are not included.
Japan	MOF announces ATM, based on Fiscal Year, not Calendar Year. Figures from 2007 to 2020 exclude saving bonds. Figures of 2021 are estimated and include saving bonds.
Mexico	The values previously reported for the ATM in 2019 (10.0), 2020 (10.3), 2021 (10.4) and 2022 (10.3) contained the amount of gross debt of the central government and not just the market debt. Our calculation of the ATM considers all outstanding market debt of the central government (short-term and long-term).
Netherlands	The information in the table is based on the data of T-bill and Bonds.
New Zealand	The calculation is based on all NZ Government marketable securities including Nominal Bonds, Inflation-Indexed Bonds, and Treasury Bills as at end Dec. The calculation excludes the non-market securities held by NZ Reserve bank and Earthquake Commission. However, it includes securities held by the NZ Reserve bank that were purchased under their Large Scale Asset Purchase programme and Government Bond repurchases.
Norway	Includes all outstanding Treasury bills and government bonds
Portugal	Excludes securities issued for collateral purposes.
Spain	Central Government Treasury Bills, Bonds and Obligations (nominal, inflation linked and assumed) and foreign currency debt.
Sweden	Marketable debt securities include: Government bonds; Inflation-linked bonds; Green bonds; Public bonds in foreign currencies; Treasury bills; Commercial paper and; foreign currencies
Switzerland	Outstanding marketable debt, excluding: - own tranches not yet issued - securities for cash management purposes - swap effects
Turkey	Weighted ATM figures reflect central government marketable debt.
United Kingdom	Treasury bills for cash management purposes, DMO’s gilt holdings and undated gilts are excluded from the calculation of the weighted ATM.
Source: 2021 Survey on Central Government Marketable Debt and Borrowing.

Notes

← 1. For example, the OECD Interim Outlook of March 2022 estimates that well targeted government fiscal measures of around 0.5 percentage points of GDP could substantially mitigate the economic impact of the crisis without substantially adding to inflation.

← 2. Maintaining a cash buffer, as a risk management tool for government cash and debt management, is a common practice in the OECD area where 29 of the 38 countries have a cash buffer policy. Countries have often resorted to pre-funding (that is, borrowing more than is required by the fiscal deficit) to accumulate the funds needed. In the wake of pandemic, most OECD DMOs built up their cash buffers to mitigate cash flow volatility and funding risk (OECD, 2021[6]).

← 3. As of 31 December 2021, EU Member countries received EUR 46.4 billion in grants and EUR 18.0 billion in loans. The combined share of Italy and Spain reached almost 70% of total disbursement (Source: https://ec.europa.eu/economy_finance/recovery-and-resilience-scoreboard/index.html?lang=en).

← 4. Fitch downgraded Mexico from BBB to BBB- in April 2020, Chile from A to A- in October 2020 and changed the rating outlook for Turkey from ‘stable’ to ‘negative’ in December 2021; S&P downgraded Chile from A+ to A in March 2021; and, Moody’s downgraded Mexico from A3 to Baa1 in April 2020 and Turkey from B1 to B2 in September 2020.

← 5. Long-term borrowing strategies are associated with higher borrowing costs in a positive yield curve environment. Term premia reflects the amount investors expect to be compensated for lending for longer periods. It is the difference between the yield on a long-term bond and the yield on a shorter-term bond.

← 6. The 2021 OECD Survey on Primary Market Developments asked extent to which countries are concerned about the adequacy of investor demand. Respondents were offered a choice between one and five, with one being “very concerned” and five being “not concerned”. In order from box one to box five, the number of responses in each box was: 3, 5, 5, 11 and 13.

← 7. Primary dealers (PDs) are financial institutions (i.e. banks or securities firms) that are entitled to buy government securities in primary markets with the intention of reselling them to others, thus acting as a market maker of government securities.

← 8. In its April meeting, the US federal Reserve announced that its plan to reduce its balance sheet over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1 2022, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps. For Treasury securities, the cap will initially be set at USD 30 billion per month and after three months will increase to USD 60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.

← 9. T-Bills are considered as ‘shock absorbers’ by sovereign debt managers. From the demand side, investors generally desire the safest, most liquid assets in times of crisis, in particular T-Bills. From the supply side, crisis circumstances often bring uncertainties regarding the size and duration of revenue shortfalls and expenses related to government support measures. Issuing short-term instruments helps to manage uncertainties linked to the financing requirement, some of which may be temporary. Considered together, both factors make this strategy consistent with the DMO’s goal of funding government at the lowest cost over time (OECD, 2021[6]).

← 10. In the United States, the percentage of debt maturing in the next 12 months jumped from 27% in 2019 to 35% in 2020 as a result of increased T-Bill financing in 2020. T-Bills as a share of total debt are essentially back to pre-COVID-19 levels excluding the Federal Reserve’s T-Bill holding where the share remains elevated compared to pre-COVID-19 levels. This is because the Fed is reducing the stock of non-T-Bill privately held Treasury securities relative to that of T-Bills.

← 11. In some countries the debt ratio is expected to remain broadly stable (e.g. Australia, Iceland and Costa Rica) or continue rising (e.g. Chile, the Czech Republic, and Finland).

← 12. It is also important note that a few countries, including Italy and Portugal, did not follow the suit to avoid potential deterioration of rollover risks.

← 13. Syndication is mostly used for i) international bond issues; ii) the first-time issuance of new instruments; iii) long(er)-dated bonds and/or the sale of first tranches of benchmark issues, and iv) targeting and directly placing securities among specific investor groups (Annex A).

← 14. Debt management offices in OECD countries are pursuing a high degree of transparency and predictability that facilitate and encourage liquid markets. Broad and deep primary and secondary markets, in turn, are instrumental in lowering the cost of borrowing for the government.

← 15. Security Lending Facilities support market participants to continuously quote prices which reduces the risk of shortages, avoids settlement problems and enhances liquidity in government debt markets (OECD, 2019[9]).

← 16. De-anchoring of inflation expectations could lead to an increase in real rates as investors require compensation against the inflation risk.

← 17. Demand from pension funds for inflation linkers partially depends on the pension system. For example, in the United Kingdom and Canada where demand for the linkers is strong, pension funds are – still – dominantly based on a defined benefit system.

← 18. A principal trading firm (PTF) is a firm that invests, hedges, or speculates for its own account.

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