The Coming Bond Maturity Wall
Bond investors know it too well. Overleveraged fixed income traders fear it. And the shorts love it. The bond maturity wall is coming up, and quickly, to the tune of $1.2 trillion.
What is a Bond Maturity “Wall”
Fear not, the bond maturity wall is nothing physical. The bond maturity wall is simply a specific week/month/year when a large portion of the fixed income market is up for maturity. That is, corporations will have to pay back the principle to lenders. When a large section of the market is up for maturity at all the same time, it can take a hefty toll on the markets as trillions of dollars are borrowed again to cover old debts.
Maturity Stacking
One popular strategy, at least from the US Treasury, is to stack or “stagger” debt issues as a way to reduce the chance of creating a maturity wall. Each week, billions of dollars in US treasuries are sold, and each have different maturity dates. By having auctions each week, and selling debt with differing maturities, the US treasury spreads out its need for cash over a full year, and extends some debt by as much as 30 years. This removes the chance of having to borrow huge sums of cash one week, and then going without auctions for many more weeks. Of course, the markets are more willing, and able, to accept huge debt sales.
Maturity Wall Shrinking, But Not for Long
The debt maturity wall has dipped substantially through 2015 with $196 billion in reductions thanks to an improving debt market. With interest rates at their lowest in years, companies are refinancing old debt, especially junk-rated corporations, selling into the strength of the high yield bond market. Unfortunately, the Fed’s quantitative easing program will soon grow silent, and the total amount of funding needed to fuel the debt markets in 2010 will be ten times larger than the net needed in 2009. Not pretty…
