Debt issuance by governments of rich countries to hit record high, OECD says

The rise in issuance comes as many central banks continue to sell bonds they acquired during the years after the global financial crisis, when they struggled to raise inflation to their targets, rather than contain it.

Households and foreign investors have stepped in to take up the slack, but the OECD warned those buyers are more likely to demand higher yields as geopolitical tensions and trade uncertainties mount.

In an annual report on debt issuance, the OECD said governments in rich countries are unlikely to have difficulty finding buyers for their bonds at interest rates they can afford, but that may not be true of governments from poorer countries or some companies.

“The persistence of high long-term rates in core markets complicates the landscape for corporate and emerging market borrowers in particular," said Carmine Di Noia, director for financial and enterprise affairs at the Paris-based research group.

The OECD estimates that total bond issuance by its member governments rose to $16 trillion in 2024 from $13 trillion in 2023, and will rise further this year to far exceed the volumes recorded before the Covid-19 pandemic.

Some 85% of that issuance will be accounted for by the governments of just five countries: the U.S., Japan, France, Italy and the U.K., with the world’s largest economy accounting for more than two-thirds of the total.

Much of the issuance taking place in this and coming years will refinance bonds that were sold to investors in the years before the rise in interest rates that followed the pandemic. According to the OECD, 45% of the outstanding bonds issued by its member governments will mature by 2027, and the new bonds that replace them will pay significantly higher rates.

As a result, governments are facing a rising bill to cover interest payments, even though many central banks have lowered their key rates as inflation has cooled. The OECD estimated that government interest payments as a share of economic output rose to 3.3% in 2024 from 3% in 2023, and exceeded spending on defense.

The difficulty governments face in finding buyers for their increased debt issuance has been compounded by sales of bonds by central banks, which began to reduce their holdings as they sought to tame the inflation surge that followed the pandemic. In countries that are members of the OECD, central bank holdings of domestic government bonds fell from 29% of total outstanding debt in 2021 to 19% in 2024.

The switch by central banks from purchasing government bonds in large amounts to shrinking their portfolios by not replacing issues as they mature means that other buyers have had to be found to absorb an additional $3 trillion in 2024, with a similar amount due this year. By comparison, in the years from 2015 to 2019, the OECD calculated that buyers other than central banks did not in aggregate increase their holdings of government bonds.

As central banks have retreated, households have stepped up their purchases, accounting for 11% of outstanding debt in 2024 compared with 5% in 2021, while foreign investors have boosted their share to 34% from 29% over the same period, OECD figures showed.

However, foreign purchases of government bonds may be disrupted by growing tensions between the world’s largest economies over trade and security.

“The availability of sufficiently large and sustained foreign demand depends on the level and functioning of international financial flows," the OECD warned. “However, geopolitical tensions and trade uncertainties may lead to rapid changes in risk aversion that could in turn disrupt certain international portfolio flows."

Write to Paul Hannon at paul.hannon@wsj.com