Extraordinarily easing of monetary policy by central banks has led to unprecedented conditions in bond markets, pushing government bonds to trade at historically low and even negative yields, notes BIS.
Bank for International Settlements in its March 2015 Quarterly Review notes aggregate international banking activity expanded further during the third quarter of 2014.
Bond markets: Over a dozen central banks eased policies
Against the backdrop of disinflationary impact of plunging oil prices and increasing foreign exchange market tensions, well over a dozen central banks have eased their policies during the past three months. The following table provides an overview of main central bank easing actions:
The BIS report points out that the policy rates of four central banks viz.: the ECB, and the central banks of Denmark, Sweden and Switzerland, were below zero early in March. These moves often surprised financial markets, fostering risk-taking and the search for yield, which pushed up valuations of risky assets.
The BIS report notes in recent months, volatilities broke away from the exceptional lows recorded in mid-2014 and move more in line with their long-term historical averages. Moreover, commodity market volatility was affected the most, with oil prices moving up to 9% on certain days, and stock markets were also more volatile during September – November 2014:
According to the BIS report, historically low interest rates and compressed risk premia pushed investors into riskier assets in their search for yield. For instance, during the four weeks following the ECB’s announcement that it would commence full-scale quantitative easing in March, European equity funds registered a cumulative inflow of almost $19 billion, the highest amount ever recorded for a similar period. Moreover, flows into US Treasury bond funds for the week after the ECB announcement were the highest since end-January 2014:
Boom in equity issuance and share buybacks
The BIS report highlights that in recent years, non-financial corporations have been issuing large amounts of equity in gross terms. Thanks to rising stock prices, those from the euro area, Japan, the UK and the U.S. raised $625 billion in new equity during 2013-14, up 66% from the previous two years. However, despite U.S. non-financial corporations issuing equity en masse, the amount raised on a net basis actually dropped, as share buybacks exceeded issuance. As can be deduced from the following graph, after a steep rise in 2014, share buybacks approached their pre-crisis peak:
Interestingly, the BIS report points out that despite the highly liquid, low-interest rate financial conditions globally, business investment in recent years has been rather weak in advanced economies. The report notes possible contributing factors could be: (a) the cost and availability of finance remain restrictive and (b) the expected return is not sufficient to justify the risk of irreversible physical investment. As can be deduced from right-hand panel of the following graph, access to bank credit is more restrictive than it was before the financial crisis, as lending standards have remained tight:
According to the BIS report, a variety of cross-currents are roiling the market-making system today. However, the report notes industry and policy efforts can help to ensure that the pricing of market-making services becomes more consistent with the actual costs and risks involved over time.