Central bankers ‘behind low market volatility they now worry about’
CENTRAL bank policy makers have expressed concern this year that low market volatility is masking future risks. In fact, they are helping cause the issue they bemoan, the Bank for International Settlements (BIS) said.
Record-low interest rates and unconventional monetary easing by the Federal Reserve, European Central Bank and the Bank of Japan reduced price swings across markets, the BIS wrote in its annual report published yesterday. That has prompted investors to take greater risks to maintain returns, even amid an uncertain global recovery, according to the BIS, which that acts as a central bank for the world’s monetary authorities.
After pumping billions of dollars into the global economy to end the financial crisis, central bankers say the new calmness makes them uneasy, because it can turn investors complacent, increasing chances for future market instability. The evidence is unprecedented.
A risk measure that uses options to forecast fluctuations in equities, currencies, commodities and bonds fell to its lowest level on record last week.
“Throughout the year, accommodative monetary conditions kept volatility low,” the Basel, Switzerland-based BIS said in the report. “By mid-2014, investors again exhibited strong risk-taking in their search for yield.
“Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.”
Last month, Federal Reserve Bank of New York President William Dudley said the slide in market volatility “makes me a little nervous”. Bank of England deputy governor Charlie Bean said conditions were “eerily reminiscent” of the pre-crisis era.
Bank of America’s market risk index closed at minus 1.31 on Thursday, the lowest level since at least 2000.
As volatility dropped and interest rates stayed near historic lows, demand for riskier assets increased. Bonds from Europe’s most indebted nations have led a rally in sovereign securities this year, while stocks indexes in the US and Europe have climbed to records.
Greek securities returned more than 30% this year through Thursday, Bloomberg world bond indices show.
Portuguese bonds gained 16% and Spain’s added 9.7%.
The average yield to maturity on euro-area government bonds fell to an all-time low of 1.30% on Thursday, according to Bank of America Merrill Lynch’s euro government index.
At the same time, Ireland, Portugal and Greece have all held over-subscribed bond sales this year, a marker of the region’s recovery from the debt crisis that froze nations out of capital markets and threatened to splinter the currency bloc.
“We do see risks, despite the fact that the markets are calm,” Bundesbank board member Andreas Dombret said this month. Mr Dombret is also a member of the European Central Bank supervisory board for the Single Supervisory Mechanism that oversees banking policy.
The Standard & Poor’s 500 index of the largest US stocks closed at its highest level ever on June 20, capping three days of consecutive records.
In Germany, the DAX index breached the 10,000 level for the first time this month, while the Stoxx Europe 600 index is only 2.2% away from a six-year high reached on June 10.