Is the only way down for sky-high asset prices?

▶ The likes of Alan Greenspan warn of several bubble-like scenarios as investors scramble for returns

From Alan Greenspan and the current US Federal Reserve staff to fund managers hoarding cash, people feel queasy about asset prices.

Euro high-yield debt is trading in line with US Treasuries for the first time ever. Tajikistan is selling Eurobonds as yields on the junkiest emerging markets drop below 6 per cent. An exchange-traded fund (ETF) for betting on low volatility has more than doubled in size this year, according to Bloomberg.

Meanwhile, bitcoin has been on a roller coaster recently, hitting record highs before falling sharply last Friday after a report from a Chinese news outlet said China was planning to shut down local cryptocurrency exchanges.

Sources close to a cross regulators committee that oversees online finance activities told the Chinese financial publication that authorities plan to shut key bitcoin exchanges in China.

Reuters was not immediately able to verify the report. But two sources in direct contact with officials at three Chinese bitcoin exchanges - Beijing-based OKCoin, Shanghai-based BTC China, and Beijing-based Huobi – said the platforms told them that they have not heard anything from the Chinese government.

The news followed China’s move earlier last week to ban so-called “initial coin offerings” (ICO), or the practice of creating and selling digital currencies or tokens to investors in order to finance startup projects.

Greg Dwyer, the business development manager at the cryptocurrency trading platform BitMEX, said there was confusion over whether China would close bitcoin exchanges following the ICO ban.

“If this turns out to be true, then this sell-off is substantiated, and we could see further downside over the weekend, as it could mean the large bitcoin/Chinese yuan exchanges will need to halt trading,” he added.

Bitcoin dropped to a low of US$4,227 on the BitStamp platform on Friday and was trading at $4,126 on the CryptoCompare site around midday UAE time yesterday, down almost 10 per cent. On September 2, it hit a record high of nearly $5,000.

The ride does not look set to be over just yet.

Russia is drawing up rules about how to conduct ICOs, breaking ranks with China after the president Vladimir Putin signalled his approval for digital currencies.

The government in Moscow plans to regulate cryptocurrencies like securities rather than outlawing them, Bloomberg reported the finance minister Anton Siluanov as saying on Friday. That marks a full reversal from his ministry’s proposal last year to punish people who use digital currencies with up to seven years in jail.

Appetite for the new instruments has been growing ever since Mr Putin met in June with the founder of the world’s second-largest cryptocurrency after bitcoin and gave his blessing for Russia to develop blockchain, the technology underlying bitcoin. A consortium of lenders including Sberbank is now seeking to use the technology to cut costs, while a presidential aide last month announced plans for an ICO.

“The state certainly understands that cryptocurrencies are a reality, there is no point in prohibiting them,” Mr Siluanov said.

“It is possible to regulate them, so the finance ministry will draw up a bill by the end of the year.”

Elsewhere, asset prices are getting “more bubbly” than in past periods of effervescence, analysts at Bank of America Merrill Lynch warn.

The fault, they say, lies with central banks, which have plied markets with almost $14 trillion of stimulus and pushed investors further out the risk spectrum to generate returns. Fed staff in August said asset prices have increased from “notable to elevated.”

The European Central Bank president Mario Draghi attempted to alleviate concerns on Thursday, telling journalists that there is “no systemic danger” from bubbles.

With so many bubble-like scenarios to analyse, several multi-asset fund managers have told Bloomberg which ones they dislike the most.

The Schroder Investment Management’s Remi Olu-Pitan agrees with Mr Greenspan’s comments last month that there is a bubble growing across fixed-income markets. The most dangerous spot, she says, is high-grade credit because that is where funds turn to for returns when they cannot make them in sovereign debt.

“The average US pension plan is still trying to generate a return of 7.5 per cent,” Ms Olu-Pitan said. “They can’t put everything in equities to generate that return, so there’s a wall of money going into debt to get that extra yield. If that starts to unravel, everything unravels and there’s nowhere to hide.”

The fact that junk-rated bonds no longer reward investors for all the risk they take on puts them in clear bubble territory for Ben Kumar, a money manager at Seven Investment in London. He points to European companies, where yields are trading near record lows.

Mr Kumar is not alone. Money managers overseeing about $1.1tn have said in the recent past that they are cutting exposure to the asset class. High-yield bonds typically respond more violently than other assets to market shocks because investors tend to cut the riskiest bets first.