Low rate loans. In recent months, developments in financial markets have continued to be driven by accommodative monetary policies. In large advanced economies, bonds and stocks recovered from summer sales and rose because it was expected that low average interest rates and high volume of purchases of securities would continue in the medium term. As a result, markets abandoned the two-week government shutdown and uncertainty about technical default. On the contrary, tensions in individual countries put pressure on several large emerging market economies and prevented the full recovery of valuations of domestic assets and capital flows. In the long run, recent events have confirmed the trend that gives large corporate borrowers direct access to credit markets.
Since mid-2012, low interest rates on standard bonds have encouraged investors to seek profitability to expand lending to companies in the higher-risk segment under increasingly favorable conditions. This investment strategy, which narrowed down credit spreads, was previously supported by low corporate bond default rates. Large nonfinancial corporations have benefited more from the credit environment than banks in advanced economies. As these banks struggled to restore market confidence over the past five years, they were constantly faced with higher financial costs than non-financial corporations with comparable credit status. Despite the fact that this price difference has recently been reduced, especially in the UK, it continues to raise interest rates on bank loans. This led to the fact that large non-financial companies began to directly finance the market, which led to an increase in corporate bond sales. As a result, in the euro area, banks were crowded out by the market as a source of new business lending.
Market skepticism has affected banks in the euro area more than comparable institutions in other advanced economies. To some extent, the low ratings reflected concerns about the quality of the balance sheets of these banks, where the reported level of non-performing loans has been growing steadily since the peak of the financial crisis. In order to restore market confidence and prepare for its future oversight role, the ECB announced a comprehensive assessment of the banking sector in the euro area and pledged to publish the results and request corrective measures from troubled banks.
Lowest loans in UK. The estimated delay in the decline has led to further growth in global stock and stock markets. Yields on 10-year Treasury bonds fell from a maximum of 3% at the beginning of September to 2.5% at the end of October, while European bond markets accounted for more than half of this decline. Since the beginning of the year, stocks surpassed US bonds, as it was assumed that free monetary policy would continue in the foreseeable future until a solid economic recovery took place. All major stock exchanges grew by 10-25% from the beginning of 2013 to November 27. In contrast, emerging economies have not fully recovered from the effects of summer sales.
Government bond yields and credit spreads remained high, and stock indices only partially offset their losses. Similarly, funds specializing in emerging market bonds had an outflow every month from June to November. Apart from the meager inflows in September and October, the respective equity funds did not behave differently.
In part, these weak indicators have shown that market participants around the world are reluctant to invest in bonds, since they believe that monetary tightening will only be delayed. These results also corresponded to the growth prospects of the main emerging economies, which were less favorable than the prospects for advanced economies. As a result, the major currencies of emerging markets offset only a small fraction of their summer losses, despite a weakening dollar in September and October.
In view of the economic situation, the ECB said interest rates are likely to remain at their current low levels for a long period. The Governing Council also decided to continue refinancing operations in full as much as needed, at least until mid-2015. Given that all major central banks of central currencies intend to continue their adaptive monetary policy, asset prices continued to reflect expectations that a low-interest-rate environment would continue in the foreseeable future.