Bondholders would lose more than $1 trillion if yields spike - BIS | Reuters

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Bondholders would lose more than $1 trillion if yields spike - BIS

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By Alan Wheatley, Global Economics Correspondent

LONDON, June 23 | Sun Jun 23, 2013 10:00am EDT

(Reuters) - Bondholders in the United States alone would lose more than $1 trillion if yields leap, showing how urgent it is for governments to put their finances in order, the Bank for International Settlements said on Sunday.
The Basel-based BIS lambasted firms and households as well as the public sector for not making good use of the time bought by ultra-loose monetary policy, which it said had ended up creating new financial strains and delaying rather than encouraging necessary economic adjustments. The BIS, a grouping of central banks, was one of the few organisations to foresee the global financial crisis that erupted in 2008. Since then, government bond yields have sunk as investors seek a traditionally safe place to park funds, regulators tell banks to hold more bonds and central banks buy bonds as a means of pumping money into vulnerable economies. The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond
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record high for most advanced economies, ranging from about 15 percent to 35 percent in France, Italy, Japan and Britain.

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"As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care," the BIS said. "Clear central bank communication well in advance of any moves to tighten will be critical in this regard."

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http://www.reuters.com/article/2013/06/23/economy-global-bis-idUSL3N0EW3EZ20130623[5/08/2013 6:09:11 a.m.]

Bondholders would lose more than $1 trillion if yields spike - BIS | Reuters

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Underlining the BIS's warning, U.S. bond prices slumped after Fed Chairman Ben Bernanke said on Wednesday that the U.S. central bank expected to reduce its pace of bond buying, now $85 billion a month, and cease purchases completely by mid-2014 if the economy continues to improve.

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The BIS acknowledged that bond yields were unlikely to rise 3 percentage points overnight. But it noted that big moves can happen quickly: in 1994 yields in many advanced economies rose by about 2 percentage points in the course of a year.

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Brushing aside the contention that austerity is counterproductive, the BIS said countries must redouble their efforts to make their debt manageable because growth alone will not do the job. "Over indebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure," the report said. The fiscal adjustments required in rich countries are especially sizeable when projected increases in age-related spending are taken into account. Indeed, the adjustments are so large that governments are likely instead to water down entitlements such as pensions, the report said. Not only has the debt of households, firms and governments increased as a share of GDP in most countries since 2007, but debt-service ratios are now higher in most rich countries than the 19952007 average - despite low interest rates. The country with the highest debt ratio is Sweden. And governments have balked at labour and product market reforms, despite overwhelming evidence that making it cheaper to lay off workers and reducing the barriers to competition in sectors such as retailing would deliver a big boost to growth. Expecting monetary policy to solve these problems is a recipe for failure, the BIS said.

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Stephen Cecchetti, the BIS's chief economist, said central banks could not do more without compounding the risks they have already created. "It is others that need to act, speeding up the hard but essential reform and repair work to unlock productivity and employment growth. Continuing to wait will not make things any easier, particularly as public support and patience erode," he said on a conference call.
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Comments (2)
birder wrote:
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And the Fed stands to loose the most having bought the most. Serves them right.
Jun 23, 201310:51am EDT--Report as abuse

Obama to propose grand bargain on corporate tax rate, infrastructure

huckel wrote: The FED did wonders in helping the economy recover from a disaster. Mr Bernake has got the timing right to start pulling out of the buying program. But it will mean that there will be a new time of volatility

http://www.reuters.com/article/2013/06/23/economy-global-bis-idUSL3N0EW3EZ20130623[5/08/2013 6:09:11 a.m.]

Bondholders would lose more than $1 trillion if yields spike - BIS | Reuters

132

Threat to U.S. embassies appears al Qaeda-linked: lawmaker

ahead as the economy learns to walk again on it own 2 feet. Thank you Mr Bernake for helping us cross this difficult time.
Jun 23, 201311:18pm EDT--Report as abuse

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http://www.reuters.com/article/2013/06/23/economy-global-bis-idUSL3N0EW3EZ20130623[5/08/2013 6:09:11 a.m.]