Market 'paradigm shift' may be under way, but more volatility likely: BIS

Sun Dec 11, 2016 6:24am EST
 
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By Jamie McGeever

LONDON (Reuters) - Financial markets have been remarkably resilient to rising bond yields and sudden shift in outlook following last month's shock U.S. election result, but the sheer scale of uncertainties ahead means the adjustment will be "bumpy", the BIS said on Sunday.

While the resilience to recent market swings following the U.S. election and Brexit vote have been welcome, investors should be braced for further bouts of extreme volatilty and "flash crash" episodes like the one that hit sterling in October, the Bank for International Settlements said.

"We do not quite fully understand the cause of such unusual price moves ... but as long as such moves remain self-contained and do not threaten market functioning or the soundness of financial institutions, they are not a source of much concern: we may need to get used to them," said Claudio Borio, Head of the Monetary and Economic Department at the BIS.

"It is as if market participants, for once, had taken the lead in anticipating and charting the future, breaking free from their dependence on central banks' every word and deed," Borio said.

This suggests investors may finally be learning to stand on their own two feet after years of relying on central bank stimulus, signaling a potential "paradigm shift" for markets, he said.

"But the jury is still out, and caution is in order. And make no mistake: bond yields are still unusually low from a long-term perspective," Borio said.

The BIS, often referred to as the "central banks' central bank", acts as a forum for the world's major monetary authorities. Its commentaries on global markets and economics give an insight into policymakers' thinking.

Bond yields have risen sharply since the middle of the year. The benchmark 10-year U.S. Treasury yield has jumped 100 basis points since July's multi-decade low, with a growing number of investors saying the 35-year bull run in bonds is now over.   Continued...

 
Specialist Meric Greenbaum works at his post on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., December 9, 2016. REUTERS/Brendan McDermid