While the stock lists continue to rise and break records, they are the bond markets to worry, crushed by the weight of the public debts. To detect the disconnection between the two markets It is a recent report from the Bri, the Bank for International Settlements, the umbrella under which all the world's central banks are gathered, which fears a spread of stress from one country to another, especially if the gigantic government bond issues are in the hands of speculative funds, such as hedge funds.
La Bri, in its quarterly report, noted that recent gains in financial markets do not adequately reflect the looming dangers resulting from the increase in sovereign debt and the global trade crisis. The litmus test, says the BRI, is theincrease in the requested premium by investors to buy 30-year debt from major economies this year, showing “growing concerns about the tax outlook".
Investors in both stocks and credit, encouraged by the public spending prospects and come on lower borrowing costs, have favored a rise that could paint a picture a rosier picture of the world than justified, the Basel-based institution emphasized. "This very optimistic assessment seems to ignore some of the concrete challenges facing the real economy," it told reporters. Hyun Song Shin, head of the monetary and economic department of the BIS. Markets are “vulnerable to the repricing due to bad news,” he added.
The statements reflect Basel officials' unease with what they described as a "risk-on tone" among investors. Interest rate cuts in Europe, the United Kingdom, and the United States supported the rally, along with government spending announcements, especially in the United States and Germany.
Market optimism contrasts with “growing unease” over fiscal outlook
The BIS warned that market optimism contrasts with the “growing unease” about fiscal outlook in advanced economies, highlighted by a steepening of the curve of yields at the very long end across all major jurisdictions, including government bonds at 10 and 30 years old.
Shin recalled that the Financial charges nationals observed around the world are reaching levels at the limit of sustainability“History shows that market stress can manifest itself long before debt levels exceed textbook definitions,” he said.
The greatest risk comes from contagion and hedge funds
Earlier this year Moody's It was the last of the major rating agencies to strip the United States of Triple-A status, while last week Fitch has cut the rating of the France at its lowest level ever due to concerns about public finances. “This is the time to pay attention to potential channels of amplification that could spread stress,” Shin said, adding that high valuations of risky assets are make them vulnerable.
He also highlighted how government bond issuance is increasingly being absorbed by highly leveraged investors, such as hedge funds.
