Thursday, 8 May 2014

On "the impact of low rates" and Investor Behaviour

Here are the U.S. Financial Stability Oversight Council's "sobering warnings about the impact of low rates on financial institution behavior" according to the WSJ (my bold),
The prolonged period of low interest rates has led investors to extend maturities, purchase lower quality credit, and increase leverage in a search for yield. As a result, higher-yielding strategies have experienced substantial inflows of funds. Financial institutions also have responded to the low interest rate environment. Banks have eased loan underwriting standards, while insurance companies and (money market funds) have moderately increased the duration of their portfolios. Although interest rates have risen from historic lows, rates could rise further and impose losses for the holders of fixed income assets. Additionally, since the majority of leveraged lending is floating rate and borrowers are highly leveraged, a sharp increase in interest rates could increase the risk of default of these borrowers and impose costs on their lenders. Of course, a continued low rate environment also has risks. It continues to weigh on earnings of banks, insurance companies, pension funds, and retirement funds, putting further pressure on them to pursue riskier investments in order to meet their targeted returns.
 And here are a couple of examples of investor behaviour that perhaps fit the above description: