LONDON (Reuters) - The ECB’s trillion euro money printing programme has put asset managers at the frontline of a possible liquidity crunch, though bringing in new rules to curb investment risk would be wrong for now, a top EU markets supervisor said on Monday.
The European Central Bank has begun a 19-month bond-buying spree, aimed at spurring the economy and helping to push yields in fixed income markets into negative territory in some cases.
“The very historically unusual monetary policy is raising risks for the non-banking sector,” said Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA).
“The risks of over-valuation both in equity markets and bond markets are considerable as a by-product of the current monetary policy,” Maijoor told the Reuters Financial Regulation Summit.
It has also left asset managers and other investors scrambling for higher yields in riskier, less liquid products, Maijoor said.
Rock-bottom interest rates and quantitative easing have driven yields on around 30 percent of euro zone debt below zero, forcing asset managers investing on behalf of insurers and pension funds to buy higher-risk, higher-reward assets to meet their clients’ unrelenting hunger for income.
Many of these assets, such as high yield corporate debt, real estate and infrastructure, offer more affordable income but at the expense of liquidity, with no clear view on how easily the assets can be sold on in the future.
Even before QE, policymakers had become concerned about whether the market had enough capacity or liquidity to cope smoothly when interest rates begin rising from their record lows.
The fear is that bond investors crowding the exits would create more “taper tantrums” or extreme swings in markets.
A sell-off in euro zone government debt, partly triggered by easing deflation worries and an investor backlash against the sky-high prices for bonds, resumed earlier on Monday, pushing German 10-year borrowing costs up by 7 basis points to 0.61 percent, broadly in line with moves seen for other euro zone government debt.
Maijoor said that despite such volatility, there was currently “abundant liquidity” in Europe.
“With the quantitative easing programme there is a lot of demand for bonds and currently the yields on bonds are extremely low, which doesn’t indicate there is a high illiquidity premium,” Maijoor said.
Accurate analysis was needed before considering whether regulators should intervene to head off possible “taper tantrums” when interest rates move towards more normal levels.
Issues around liquidity, which banks blame on higher capital charges for rendering market-making more expensive, might be related to the bigger, temporary role of central banks in the market, Maijoor said.
“We need to be careful about jumping directly to the conclusion that there is a new need for rules and regulations. We are looking intensively into this issue of liquidity, but I think before we make next steps, we need to be clear what the origins of these problems are.”
Reporting by Huw Jones; Editing by Ruth Pitchford