Australia’s central bank is concerned riskier assets such as stocks and high-yield corporate debt could be set for widespread losses if there is a sudden increase in government bond yields.
The Reserve Bank of Australia says years of ultra-easy monetary policy from major central banks have seen government bond yields fall to unprecedented levels, at least for modern times, helping to boost asset prices further out the risk spectrum and encourage risk-taking among investors.
The bank warns current asset valuations, which are reliant on global bond yields staying low, are “elevated relative to history”. In addition, it says returns for holding many risk assets have fallen to record low levels.
The RBA cautions that a sharp increase in long-term government bond yields toward historically normal levels “could result in widespread asset price falls if it is not accompanied by stronger growth”.
“Valuations for fixed income securities could fall sharply if interest rates rise substantially because of higher realised or expected inflation, while valuations for assets more broadly could fall if risk premia return to historically more normal levels.”
This chart from the RBA shows how riskier assets performed during the “taper tantrum” of 2013 when US bond yields spiked as the Federal Reserve announced that it would begin reducing monthly asset purchases as part of its quantitative easing program.
There’s more on the subject here.