Speaking at Bundesbank’s spring conference, president Jens Weidmann warned that the market is at risk of reversal in risk-premia that can turn when future expectations of interest rate expectations shift. He said the effectiveness of European Central Bank’s (ECB) monetary policy depends on financial market condition.
A major rally in global bond markets has pushed the global government bond yields top record low of 0.65%, according to Bank of America Merrill Lynch index. In anticipation of rate hikes from central banks can lead to a shift in asset managers’ choice of portfolio securities, which in turn could lead to a sudden major shift in risk-premia.
Recent reaction of the market to Japanese negative interest rate introduction shows how these latest policies launched by the market depends on market expectations. Despite an introduction of fresh new stimulus from Bank of Japan (BOJ), Yen strengthened in expectations that Bank of Japan (BOJ) is running out of tools to stimulate the economy.
As an effect of ultra-loose monetary policies from central banks, asset managers are taking up more risks than they are compensated for, in their hunt for excess return and yield.