BREAKING: Central Bank Group BIS Warns of Runaway Markets

LONDON, Dec 7 (Reuters) - The surge in financial markets following COVID-19 vaccine breakthroughs and the U.S. election has left asset prices increasingly stretched, central bank umbrella group the Bank for International Settlements (BIS) has cautioned.

The BIS’ quarterly report on Monday noted how credit markets and some of world’s biggest stock markets had surpassed their pre-pandemic levels despite the significant degree of uncertainty that still remains over the pandemic as it continues to spread.

Claudio Borio, Head of the BIS Monetary and Economic Department, said a rally had been justified by the vaccine news and ongoing fiscal and monetary stimulus, but there were also signs of an overshoot.

“A certain amount of daylight between risky asset valuations and economic prospects appears to persist,” Borio said, adding that “questions about overstretched valuations” had already been present before the coronavirus crisis.

The Basel-based BIS’ views are often watched by economists as the world’s top central bankers take part in its behind-closed-doors meetings.

Borio said one of the developments it was particularly wary of was the rapid easing of stress in corporate credit markets.

“We are moving from the liquidity to the solvency phase of the crisis,” Borio explained to reporters.

“We should be expecting more bankruptcies going forward yet credit spreads are quite low by historical standards, and indeed while banks are pricing risk more carefully we don’t see the same in capital markets.”

He added that with $17.5 trillion worth of bonds now carrying negative yields - meaning that investors effectively pay rather than get paid to hold them - many money managers were being pushed into riskier and riskier assets.

That itself is a risk and underscores the “tricky waters” major central banks are now navigating. They have provided trillions worth of stimulus this year and are expected to continue to do so going forward.

“The outlook is rather uncertain and you would rather err on the side of doing too much as opposed to doing too little,” Borio said.

Reprinted from Reuters. The copyright is reserved by the original author.