Bond Bubble Threatens Financial System, BoE Official Claims

The biggest global risk to financial stability is posed by a potential jump in bond yields that might happen for reasons beyond the unwinding of central bank policy, according to Bank of England (BoE) official, Andrew Haldane.

Haldane, the BoE’s executive director for financial stability, told the UK parliament’s Treasury Select Committee that central banks’ massive asset-buying programmes have created significant risks.

“If I were to single out what for me would be the biggest risk to global financial stability right now, it would be a disorderly reversion in government bond yields globally,” he said in testimony to UK members of parliament (MPs). “We’ve seen shades of that over the last two to three weeks.”

Haldane suggested that people have tended to overfixate on signs of the end of quantitative easing (QE) or forward guidance as the spark for a pickup in yields, Haldane said. Other triggers include the reversal of the so-called ‘flight to safety’ that has pushed yields down in recent years. The BoE’s financial policy committee (FPC) must assess the impact and risks, he added.

“We have intentionally blown the biggest government bond bubble in history,” Haldane said. “We’ve been vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted. That’s a risk we as FPC need to be very vigilant to.”

Yields have been at record low levels this year, reflecting the electronic money printing exercises by the BoE and the US Federal Reserve, but in recent weeks have moved higher. UK 10-year gilts have traded at a yield of 2.17% this week, up from 1.6% at the beginning of May.

Asked about other potential risks to the financial system, Haldane said regulators and government should “take a close look at the state of preparedness” of major banks to protect against cyber -attacks in which their electronic payment systems could be threatened.


Related reading