The Bank for International Settlements reports in its quarterly review that the search for yield in the last quarter intensified as interest rates globally continued to fall. Investors should expect much of the same type of report over the next several quarters, or more likely years, as a combination of a global slowdown and US Federal Reserve and the European Central Bank action weighs on interest rates.
As a result of previous like measures from central banks as well as concerns about Europe, the BIS said in its mid-June to mid-September report, investors have been piling into high-yield and emerging market debt. “Such low yields on advanced economy government bonds spurred investors to search for investment opportunities that offered some extra return,” the BIS said.
This was perhaps spurred on by the “extraordinarily low volatility” in credit, foreign exchange and equity markets over the past several months. “As a consequence,” the BIS said, “assets traditionally perceived as risky may have been less affected by the deterioration of the growth outlook and the euro area strains compared to previous episodes.” So things are so bad that even the riskiest areas/companies of the world seem safe compared to sovereign concerns in Europe and the US.
Just in the last two weeks, the Fed and the ECB have recently put their full weight on top of interest rates; both embarking upon big bond-buying schemes to help them keep those rates low. For its part the Fed and its Fed Open Market Committee last week gave itself lots of flexibility in that department.
“The amount of asset purchases that we undertake will be a function of how the economy evolves,” said New York Fed president William Dudley in a speech today. “If the economy is weaker, we’ll do more. If the economy is stronger, and we see a substantial improvement in the outlook for the labor market sooner, we’ll end up doing less.” And they will keep them “at exceptionally low levels” to make sure the momentum sticks. Much to the chagrin of many investors and corporate treasurers, the FOMC also extended its “exceptionally low” interest rate policy to mid-2015 from mid-2014. Mr. Dudley said he doesn’t “think this was due to greater pessimism about the economic outlook.” With both the Fed’s “statement and our projections, the proper inference is that we were acting to secure a better outcome.”
But for treasurers, it means a continued search for what’s turning out to be the Holy Grail – a decent return.