© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: May 10, 2013 6:40 pm
Ben Bernanke warned against excessive risk-taking in financial markets on Friday as the dollar was driven up in the latest manifestation of a desperate global hunt for yield.
In a speech in Chicago, the US Federal Reserve chairman said he was watching for signs of reckless speculation caused by low interest rates, highlighting the danger that easy monetary policy could inflate new bubbles in asset prices.
His comments show how low interest rates have come to dominate global financial markets as waves of monetary easing send investors scurrying around the world for anywhere they can earn a return on their cash. The average yield on lowly rated corporate debt, or junk bonds, this week dipped below 5 per cent to a record low that is less than US Treasury bonds yielded in 2007.
“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” Mr Bernanke said.
The dollar climbed against the euro and the yen after the European Central Bank cut interest rates last week and Japanese investors became net buyers of foreign bonds for the first time since the Bank of Japan launched a drastic campaign of monetary easing.
Haruhiko Kuroda, Bank of Japan governor, said the bond-buying programme was not targeting the value of the yen, in line with an agreement reached by the world’s largest nations this year to ward off fears of a fresh round of currency wars.
Wolfgang Schäuble, Germany’s finance minister, told reporters before a meeting of the Group of Seven finance ministers and central bankers near London on Friday that Japan had promised to take a cautious approach on the value of its currency, which has caused concern among its trading partners in Asia and Australasia.
Heavy selling of the yen sent it down more than a percentage point against the dollar to Y101.7, accompanied by sharp rises in benchmark government bond yields, with investors rotating into the dollar, equities and low-rated bonds.
The moves suggest that investors once again see the US as a bright spot in the global economy, with traders betting a healthier jobs market and concerns about excessive risk-taking could lead the Fed to slow down its third quantitative easing programme under which it is buying $85bn of assets every month.
“With Japan stepping up and possibly the eurozone, it opens the door for the US to taper QE,” said Richard Gilhooly, strategist at TD Securities. “Even if this is six months away, we will see people get out of the US Treasury market and the next leg of the rotation is out of cash and bonds into equities.”
Lena Komileva, chief economist at G+ Economics, said the switch in investor flows out of negative real yields in government bonds and towards the carry of riskier assets was set to continue “as long as central banks are focused on output gaps and inflation”.
Mr Bernanke stopped short of former Fed chairman Alan Greenspan’s famous 1996 warning of “irrational exuberance” in the stock market, but it comes at a time when equities are hitting new highs before adjusting for inflation, and high-yield bonds no longer carry high yields.
Mr Bernanke said that risk-taking alone would not concern the Fed. It would only be dangerous if the risk-taking involved illiquid assets or it was backed by large amounts of short-term debt.
“Also to be considered are factors such as the leverage and degree of maturity mismatch being used by the holders of the asset, the liquidity of the asset, and the sensitivity of the asset’s value to changes in broad financial conditions,” said Mr Bernanke.
He said that the bursting of the dotcom bubble in 2000 and 2001 had not disrupted the financial system because the losses were spread out. In 2007-09, however, the losses from bad mortgages were concentrated in systemically important banks.
Mr Bernanke said that the Fed is also working with individual banks to stress test what would happen after a change in interest rates. Another risk of a long period of low interest rates is that banks would suffer losses when rates go up.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in