The monetary and fiscal stimulus implemented by the US Federal Reserve during the 2-year pandemic will lead to record levels of global debt by the end of this year, continuing a trend that began in 2021.

According to UK global asset manager Janus Henderson, global sovereign debt will increase by 9.5% to reach a record $71.6 trillion in 2022. Debt growth will fall primarily on the US, Japan and China, although further credit growth will affect almost all countries.

Overall, global public debt jumped to $65.4 trillion in 2021, while global sovereign debt has risen by more than a quarter since the start of the pandemic (from $52.2 trillion from January 2020 to today).

Each of the countries studied by the UK team saw credit growth in 2021. In China, for example, debt increased by one-fifth ($650 billion) and grew at the fastest pace, mostly in liquid assets.

Among the major advanced economies, Germany saw the largest percentage growth in credit: they grew by one-seventh (14.7%) at a rate almost double the global average.

But despite the volume of lending, the cost of servicing debt has remained low. The effective interest rate on government debt as a whole was just 1.6% last year, down from 1.8% in 2020; while the total cost of debt fell from $1.070 billion in 2020 to $1.010 billion.

On the positive side, the relatively rapid global economic recovery has improved the global debt-to-GDP ratio from 87.5% in 2020 to 80.7% in 2021, and the recovery in economic activity has actually been faster than credit growth.

In the first 2 years of the pandemic, bond markets around the world showed a “synchronized trend”, but this has now changed. For example, the US, UK, Europe, Canada and Australia are focusing on tightening their monetary policies to stem inflation, both by raising interest rates and phasing out quantitative easing programs.

China’s central bank, on the other hand, is pursuing a more adaptive policy to support its own economy.

In this environment, there is a good opportunity to place assets in short-term bonds, which are less sensitive to changes in market conditions. The market is expecting more rate hikes than are likely to occur, which means that short-term equities should be favored in the event of an early end to the tightening cycle.