by Anthony Murtagh
As if we needed telling, the Bank of International Settlements (BIS) – virtually the only organisation to foresee the 2007 financial crash – has warned that global asset prices have yet again risen to giddy highs and may be losing touch with economic reality.
“Unusually, equity and fixed income gains coincided with a weakening of the global economic outlook,” said the bank in its quarterly report, reminding us that “in the past, falling growth forecasts have usually been associated with rising expected default rates and higher bond yields”.
Yet even more of a concern is the fact corporate bonds have reached levels comparable with those of late-2007, despite the default rate of those bonds running at 3% today as opposed to around 1% in late-2007. Yields on mortgaged-backed bonds, meanwhile have fallen to the lowest level ever recorded.
All this comes against moves by the International Monetary Fund and the OECD earlier this year to downgrade their outlooks for 2012 and 2013 for much of Europe and emerging markets including China, India and Brazil.
Looser monetary policy by governments has brought another tidal wave of cheap credit, meaning bond investors are seeing lesser returns for risk today than in the past. Consequently, with rates on bank deposits close to zero, some are seeking out better short-term returns on riskier products much like in the years preceding the financial crash.
Sow we’re very nearly full circle. Still there has been no concrete structural readjustment to the global economy, and little to nothing has been done about the fundamental problems of the banking system. Basel III is a step in the right direction, but no more a solution than a dose of ibuprofen is to a fractured skull.
As it is it must be hoped that this time insurance companies and pension funds are able to show restraint in the face of pressure to add an extra few points of yield to their portfolios. But I won’t be holding my breath.