Dovish central banks distort bunds, linkers, mortgages, BIS says


By Anchalee Worrachate
Bloomberg News
Sunday, September 13, 2015

Central-bank policies are producing unintended consequences for assets such as German bonds, European inflation-protected securities, currencies, and Swiss mortgage rates, according to the Bank for International Settlements.

The European Central Bank's purchases of government bonds to stave off deflation risk have probably added to a drop in liquidity, consequently increasing price swings of German government bonds, the region's benchmark security, the institution said in a report released Sunday:

It noted that banks' scaling down on their inventory holdings of fixed-income assets is part of the long-term trend of a decline in liquidity.

Ultra-long German bonds, securities with remaining maturity longer than 12.5 years, were affected the most, the report said. The size of transaction that can be executed at the best available bids and offer prices for these securities, a market gauge known as order-book depth, has dropped to 16 million euros ($18 million) from 25 million euros in the first half of the year. Lower order-book depth means even a relatively small increase in trading volume can lead to larger price swings.

"Reduced market liquidity and central-bank actions may have played a role," the institution said. Some observers suggested the ECB's bond purchases, which started in March, "may have further reduced the supply of tradable German bonds, which had already been fairly strained due to low issuance volumes."

The ECB's QE program, which included index-linked bonds, also distorted an inflation-expectation signal traditionally extracted from the market, according to the BIS, which was formed in 1930 and acts as a central bank for the world's monetary authorities. ...

... For the remainder of the report:


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