According to the
BIS’ latest Quarterly Review financial markets are starting to
behave in some of the ways they behaved before the crash. In
particular, investors seem to be chasing riskier and riskier assets,
despite the fact that the economic prospects are hardly all that
great.
“Some asset prices started to appear
highly valued in historical terms relative to indicators of
their riskiness.
For example, global high-yield
corporate bond spreads fell to levels comparable to those of
late 2007, but with the default rate on these bonds running at
around 3%, whereas it was closer to 1% in late 2007."
“The same was true of investment
grade corporate bond spreads, but with respective default rates
of a little over 1% and around 0.5%.
Indeed, numerous bond investors said
that they felt less well compensated for risk than in the past,
but that they had little alternative with rates on many bank
deposits close to zero and the supply of other low-risk
investments in decline.”
Bond yields usually move in line with
the wider economy’s growth prospects, but clearly these two lines
have started to diverge in recent months. There is something going
on.
Sky argues:
At least part of the likely explanation
- and this is my interpretation rather than the BIS’ - is that the
flood of money being set loose by central banks, including the Bank
of England and
the Federal Reserve, through
quantitative easing is pumping asset prices higher.
