QE unlikely to have created asset bubble

> Risks from fall in prices and any other fallout when quantitative easing is withdrawn overestimated: Moody’s

PETALING JAYA: Moody’s Investors Service opined that risks from falls in asset prices and any associated economic fallout as and when quantitative easing (QE) is withdrawn are overestimated.

The rating agency said in its report that global asset prices continued to expand slightly in the second half of 2017, mainly driven by advances in equity prices, while sovereign bond prices weakened further but remained significantly above longterm averages.

However, it stressed that even though those asset prices may fall back when QE is withdrawn, that does not imply an “asset bubble”.

“In fact, declines in long-term interest rates have been driven by more than just QE.” Moody’s foresees global financial conditions to remain favourable for bond issuance and credit in 2018 on the back of robust economic growth and broadly stable asset quality and capital levels in the banking sector.

“Global financial market risks remain moderate, with little change in underlying pressures over the past six months. Our assessment remains broadly unchanged in the continued absence of significant macroeconomic, financial, and political shocks,” said Moody’s managing director of credit strategy and the report’s coauthor Colin Ellis.

Moody’s said global economic growth strengthened in 2017, and is expected to remain robust over the next two years.

However, the rating agency noted that risks remain and there is uncertainty stemming from geopolitical developments on the Korean peninsula and the Middle East, and the potential for substantial shifts in US economic policy.

Moody’s expects policy rates to peak at lower levels than seen in the pre-crisis period, which is consistent with long-term rates – only partly unwinding past declines. Some of the observed decline in benchmark long-term yields is likely to be permanent.

Meanwhile, it noted that the low corporate bond yield level is partly due to the benchmark rates, while spreads on investment-grade bonds are not unusually low.

“Credit spreads for high-yield bonds are tighter, but – on average – not out of synch with Moody’s ratings for high-yield issuers.”