Pressure on banks to reduce stimulus
After a huge build-up in central bank balance sheets in recent years, the Bank for International Settlements added to fears of a bond market rout on Monday, saying central banks' extraordinary policies promoting cheap credit had done enough to stabilise the global economy.
BIS general manager Jaime Caruana argued that central bank policies to buy government bonds in the US, Britain, Japan and Europe were starting to become less worthwhile and markets had become "overdependent" on stimulus. Central banks in these countries have slashed interest rates to near zero and expanded their balance sheets since the global financial crisis.
In the past six years, central bank balance sheets globally have risen from $US10.4 trillion in 2007 to $US20.5 trillion today.
"Half a decade ago, most, if not all, of these measures were unthinkable," Mr Caruana said. "Their emergence shows how much responsibility and burden central banks have taken on.
"Monetary policy has done its part. Recovery now calls for a different policy mix - with more emphasis on strengthening economic flexibility and dynamism and stabilising public finances."
The comments came as the yield on 10-year Australian government bonds hit a 15-month high above 4 per cent - reflecting lower investor demand for bonds globally. Bond prices and yields move inversely.
The spike in yields has occurred as investors grapple with the implications of the US Federal Reserve's signal last week that it planned to curb its $US85 billion-a-month bond-buying program.
Traders have also been rattled by a spike in Chinese interbank rates.
Nomura Australian interest rate strategist Martin Whetton said withdrawing stimulus too quickly threatened to derail the US recovery by pushing up bond yields and raising borrowing costs. US mortgage costs - which are set off bond markets - have already risen sharply in recent months.
"If you push borrowing rates up too much higher, then it's going to stall some of the recovery," he warned.
Frequently Asked Questions about this Article…
The BIS warned that extraordinary central bank policies — like buying government bonds and keeping interest rates near zero — may have done enough to stabilise the global economy. BIS general manager Jaime Caruana said markets had become "overdependent" on stimulus and that future recovery will need a different policy mix, including stronger public finances and greater economic flexibility.
Bond yields have risen because investor demand for bonds has fallen amid signs central bank stimulus could be wound back. The article notes the 10-year Australian government bond yield hit a 15-month high above 4%. Remember bond prices and yields move inversely, so rising yields mean falling bond prices and higher borrowing costs, which can affect fixed-income returns and interest-sensitive parts of the market.
Withdrawing stimulus tends to push bond yields higher, and mortgage rates in many countries are linked to bond markets. The article points out the US Federal Reserve signalled plans to curb its US$85 billion-a-month bond purchases, and Nomura strategist Martin Whetton warned that higher bond yields have already pushed US mortgage costs up sharply — meaning broader borrowing costs can rise if stimulus is withdrawn too quickly.
The Fed’s recent signal that it planned to reduce its US$85 billion-a-month bond-buying program contributed to the spike in yields, as investors priced in less central bank support. That change in expectations reduced demand for bonds globally and helped drive up yields, including on the Australian 10-year government bond.
Traders were rattled by a spike in Chinese interbank rates because it suggests tighter credit conditions in one of the world's largest economies. The article links that spike to broader concerns about global credit conditions and contributes to upward pressure on yields and borrowing costs globally — a factor everyday investors should watch as it can affect global markets.
According to the article, total central bank balance sheets globally rose from US$10.4 trillion in 2007 to US$20.5 trillion at the time of reporting — reflecting a huge build-up of stimulus measures since the global financial crisis.
Yes — the article highlights warnings that pulling back stimulus too fast could derail recovery. Nomura’s Martin Whetton said rapid withdrawal could push borrowing rates much higher, potentially stalling parts of the recovery by making credit and mortgages more expensive.
Investors should monitor central bank signals (especially from the US Federal Reserve), changes in 10-year government bond yields (like Australia’s), movements in mortgage costs, and stress indicators such as Chinese interbank rates. The BIS commentary also suggests keeping an eye on broader policy shifts toward fiscal stability and economic flexibility as stimulus is re-evaluated.
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