Global risk binge gives central bankers cause to shudder

Bloomberg

Global central banks are approaching the end of the year with a collective shudder at the risky behaviour that their low interest-rate policies are encouraging.
Policy makers from European Central Bank (ECB) and the Federal Reserve are among those raising cautionary flags at potentially unsafe investing stoked by their efforts to flood economies with ultra-cheap money. Stock indexes from the US to India are at records, and low sovereign bond yields have pushed funds into property seeking better returns.
The warnings are couched in measured language that doesn’t signal panic, but the combined message is one of growing anxiety, laced with the discomfort that central bankers can’t easily tighten policy either. The danger is that such risk-taking recreates a backdrop similar to that preceding the global financial crisis a decade ago.
“Markets have been complacent, but this is probably the outcome of low rates or negative rates,” Sergio Ermotti, chief executive officer of UBS Group AG, told Bloomberg TV at the New Economy Forum in Beijing. “The chances that one day or the other things are going to be out of sync is increasing.”
Historically-low interest rates are warping markets. In August, some $17 trillion of global investment-grade debt, around a third of the total, had negative yields. That means investors holding a bond to maturity may receive less at the end than they paid out at the beginning — upturning financial wisdom that you should get compensated for lending money.
Despite central banks’ qualms about side effects, there’s little sign that they’ll do any more than issue warnings. In fact, their desperate efforts to boost inflation saw them unleash another round of monetary loosening this year.
“The Fed since September, the ECB as well, the BOJ, even the central bank of China is starting to provide some more easing,” Kevin Thozet, an investment strategist at Carmignac Gestion, told Bloomberg TV. That’s contributed to “a bull market of everything in 2019.”
The result is lower sovereign borrowing costs even in some of Europe’s riskier nations as investors seek out the few remaining places that offer a positive return. Ten-year yields in crisis-ridden Italy are barely above 1%.