On the Way to a Bond Market Bubble

BUDAPEST, Hungary, April 2, 2015 /PRNewswire/ --

Central banks cutting interest rate to zero or below zero might be quite risky, said Karád Kovács, Senior Analyst at Innovative Securities. The constant money pump and the QE programmes had already put pressure on the government bonds yields: European bond yields have fallen to a record low, driving short and mid-term bond yields negative. ECB's QE programme can cause more pressure and keep yields on minimum low.

What's more, personal savings will be affected by the low interest rates as investors' money will not bring in interest but will be worth less, said the analyst. During the global yield hunt people started to take more risks; when the interest rate is zero or below zero, every asset is worth buying just to have some yield, so money is flowing into stock markets and real estates. It is possible that stock markets' prices continue to rise and deviate from the usual valuations. It is also possible that we will be facing asset-price bubbles in the upcoming years, as on the bond market it has already been happening. The consequences of this can be severe, believes Innovative Securities. If inflation kicks-in, central banks have no choice but to react with interest rate hike which might result in bond yield rise. Rising interest rates could result in even more serious consequences on the stock markets' and real estate valuations and can generate price fall. But the dramatic and quick dollar rise has reached a level that it limits the FED's ability to tighten without causing serious consequences around the world, said Kovács.

It seems that central banks' zero interest rate can hardly help the economy because companies do not invest significantly more and private consumption has been lagging because of the current deleveraging in Europe.

If we look at the bigger picture, a normal (1-2 per cent) interest rate would be healthier; it would still be able to help the economy but would not blow asset-price bubble, stated the analyst. Until then, money will flow into the markets and European economy is expected to recover. Interest rates cannot stay this low forever and once they start rising, many countries will not be prepared for its negative impact. There is no need to put the cart before the horse but right risk management becomes even more important.

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SOURCE Innovative Securities Limited

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