BIS’s Borio warns of ‘troubling’ negative yields

The Bank for International Settlements’ Claudio Borio has described the growing prevalence of negative-yielding debt as “vaguely troubling”, as the institution looks back on a turbulent quarter.

Borio, who heads the BIS’s monetary and economic department, noted negative-yielding debt hit new highs during the quarter – a peak of $17 trillion, according to some estimates. Some households could even borrow at negative rates.

“A growing number of investors are paying for the privilege of parting with their money,” said Borio at the launch of the BIS quarterly review. “Even at the height of the Great Financial Crisis, this would have been unthinkable. There is something vaguely troubling when the unthinkable becomes routine.”

The review highlights how yields across Europe and in “most” tenors in Japan “dived into negative territory” during the past quarter. Even countries with “lingering growth and debt concerns, such as Italy”, enjoyed negative yields at the short end.

With a resumption of volatility in financial markets linked to escalating trade tensions, the past quarter was marked by fresh rounds of easing by many central banks, despite those in advanced economies having limited room to cut rates.

“The exchange rate/monetary policy nexus became part of the trade rhetoric, threatening further tensions,” Borio added in a briefing with journalists.

The monetary policy normalisation process has reversed; policy rates have started to decline again and central bank balance sheets to grow in aggregate

Claudio Borio, Bank for International Settlements

US president Donald Trump, whose administration has been leading the trade war against China and other countries, including Mexico, has criticised the Federal Reserve for not easing monetary policy enough. He complained in several recent tweets that the European Central Bank has eased more aggressively than the Fed and is benefiting from a weaker euro.

“The monetary policy normalisation process has reversed; policy rates have started to decline again and central bank balance sheets to grow in aggregate,” said Borio. “The room for monetary policy manoeuvre has narrowed further.”

He added his voice to those of several central bankers in calling for fiscal policy to shoulder more of the burden of stimulating the world’s flagging economies.

Growing vulnerabilities

The BIS review studies several emerging risks, including the growth of collateralised loan obligations (CLOs), which bear some of the hallmarks of the collateralised debt obligations that played a key role in the 2008 crisis.

Economists Sirio Aramonte and Fernando Avalos look at the issue in a box in the report. They see parallels with 2008, but say the CLOs have a simpler structure, avoid the use of credit default swaps and re-securitisation, are little used in repo transactions and are less commonly funded by short-term borrowing.

That said, there are also “similarities”, the authors warn. Deteriorating credit quality, opaque indirect exposures, a high concentration of banks’ holdings and uncertain resilience of senior tranches could all contribute to instability, they say.

“Losses on these asset classes, and leveraged loans more generally, are likely to amplify any economic slowdown,” added Borio in his remarks.