WRAPUP 1-Government borrowing costs jump as virus-related support costs climb
By Yoruk Bahceli and Abhinav Ramnarayan
LONDON, March 18 (Reuters) - Borrowing costs in the United States, euro zone, Britain and Japan surged on Wednesday after two days in which governments across the globe announced trillions of dollars of spending to support locked-down economies frozen by the coronavirus.
Bond markets struggled to assess the scale of borrowing that may be needed to fund spending programmes including direct transfers to households, tax breaks for business, income support and loan guarantees, as well as whether central banks may be forced to directly monetize those debts with new money.
The sell-off in Italy's sovereign bond was sharpest, forcing the European Central Bank to intervene to stabilise the market via the Bank of Italy.
Bond sales were exacerbated by dire trading conditions across financial markets, reflecting a lack of two-way trading and liquidity as well as concerns that investment funds were forced sellers of top-rated assets to raise cash to meet expected redemptions after weeks of portfolio losses.
The spread between bids and offers -- a key liquidity gauge -- widened sharply https://tmsnrt.rs/2wg0T1u.
Government support programmes announced so far come to well in excess of $2 trillion for the G7 economies. Several countries have indicated more is to come.
Economists at Germany's Commerzbank estimate U.S. government pledges were equivalent to the packages announced by President Barack Obama 11 years ago and would raise the budget deficit to about 8.5% of output for 2020 and 2021 - compared to 9.8% in 2009. Total debt to output would likely rise to more than 100%, they said.
Rabobank economists estimate government spending announced by the five biggest euro zone economies amounts to between 1.8% to 2.4% of gross domestic product, with liquidity measures ranging between 8% and 16% of GDP.
Germany alone could raise up to 35 billion euros of new debt this year, according to some estimates - around 17% percent more than already budgeted.
"The concern remains that the sizeable fiscal responses we are seeing...only accentuate credit risk on the part of more heavily indebted euro zone members," said Richard McGuire, head of rates strategy at Rabobank.
Italy, with a debt-to-GDP ratio of 135%, plans extra spending of 25 billion euros, or 1% of annual output, while Spain's 200-billion euro package equals a fifth of its gross domestic product. Its debt pile is 98% of GDP.
MARKETS REPRICE
U.S. 10-year borrowing costs jumped back above 1% on Wednesday and are up almost 75 basis points from recent record lows. Germany's 10-year yields at one point looked set to rise above 0% for the first time since April 2019 and are up more than 60 bps from record lows at the start of last week.