The price of risky assets is approaching pre-crisis levels, with investors putting a greater degree of risk on the table in Q3 despite a weakening economic outlook, according to the Bank for International Settlements (BIS).
The latest quarterly report from BIS has warned some asset prices appear highly valued in a historical context, relative to indicators of their riskiness.
The central banking organisations, one of the first major bodies to predict the credit crunch five years ago, added spreads on corporate bonds have fallen to pre-crisis levels, leading bond investors to feel short changed for the level of risk they are taking on.
“Asset prices generally increased during the period from the beginning of September to early December, supported by further easing of monetary policies and perceptions that some major near-term downside risks had eased,” said the BIS.
“Some asset prices started to appear highly valued in historical terms relative to indicators of their riskiness, for example global high-yield corporate bond spreads fell to levels comparable to those of late 2007, but with the default rate on these bonds running at around 3%, whereas it was closer to 1% in late 2007.
“Indeed, numerous bond investors said that they felt less well compensated for risk than in the past, but that they had little alternative with rates on many bank deposits close to zero and the supply of other low-risk investments in decline.”
The bank added equity and fixed income gains during the third quarter had been supported by further easing of monetary policies and perceptions that some major near-term downside risks have eased.
However, risk asset prices have reached elevated levels, posing significant longer-term risks to valuations.
“Significant longer-term risks to future asset valuations remain, including those related to the euro area crisis, US fiscal policy and the subdued outlook for global economic growth,” the bank added.
“Yet equity implied volatilities, including those with longer horizons, fell close to the historically low levels of the mid-2000s.”
This article was first published on Investment Week