samchain/econo-pairs-v1 huggingface dataset:
The question we ask is ‘could they reasonably be judged to be stretched?’ In global corporate bond markets, the answer is yes. As we highlighted back in November, corporate credit appears priced for perfection. Investors expect short-term risk-free interest rates to stay pretty low. And they are demanding little compensation for that being wrong or for the possibility of corporate default. Conviction that interest rates will remain low has meant the ‘term premium’ investors’ demand for holding longer-dated fixed income bonds has rarely been lower. Conviction that growth will be steady and corporations healthy has meant the credit risk premium investors demand for holding corporate bonds has compressed. All in, spreads between corporate bond yields and the estimated path of expected short-term interest rates are below pre-crisis levels. So it’s not just that, as in recent weeks, corporate bond yields are at risk from the – hardly radical – possibility that sustained global growth might mean higher global interest rates. They are also at risk of a reappraisal of how uncertain the outlook is for interest rates and corporate health. 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  The compression of bond yields has been especially pronounced at the riskier (‘high yield’) end of the market. The difference between yields on high-yield and investment-grade bonds has shrunk to levels seen prior to the global financial crisis. However you look at it, it’s cheap for companies to borrow in bond markets.

Corporate credit markets are stretched. Finance is cheap because bond investors seem to be less concerned about the safety of their investments. So in this speech, I want to consider the degree to which these markets have become stretched, and how well conditioned the wider economy is for that stretching. Will it cause a strain? 1. When do stretched asset prices (not) strain the wider economy? Before we turn to the world today, I’d like to frame the issue. I start from the point that asset prices are not - horror of horrors - always a reflection of the rest of the economy. 3  They can be stretched above levels supported by ‘fundamentals’ as investors squeeze the compensation they get for the risks they take. When they later adjust, some investors have a bad day and others a good one, but the ups and downs of asset markets don’t have to be a problem for the wider economy. For stretched asset prices to strain the economy, I think one or more of the following channels needs to be active. All share the common theme of the wider economic body not being fit enough to cope. 3  See Claessens and Kose (2017) for a review. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  i)  The level of debt in the corporate sector comes to rely on stretched asset prices.
The real exchange rate of the króna is somewhat below its likely long-term average, although it has risen in the past year. 6  BIS Review 138/2010  As economic recovery gains pace, the outlook for capital account liberalisation improves. Recovery tends to be accompanied by increased inflow of foreign capital in the form of credit or direct investment. Significant inward foreign direct investment could set the stage for removal of the controls. Although suggestions that recovery began late in 2009 or in the first half of 2010 have proven to be a mirage, a number of indicators imply that Iceland has hit bottom or is close to it, and that growth will resume in the latter half of this year. But the pace of the recovery will depend greatly on our success in attracting foreign capital for exportgenerating investment. The main objective of the IMF programme is to build confidence in Iceland’s economy and economic policy. If that confidence existed now, it would be possible to lift the controls today. Considerable discussion has been devoted to the instability of foreign capital that could flee as soon as the controls that hold it in place are reduced or eliminated. Although the magnitude of foreigners’ frozen ISK assets is broadly known, information on non-resident retail owners of ISK assets is largely hidden.

The partnership between the European Investment Bank and the commercial banks in Romania ensure the effective transmission mechanism to allocate and distribute the European structural funds to the infrastructure projects, to the development of production capacities of the small and medium enterprises and to the creation of new jobs in the economy. The banks are well capitalized, have an excellent solvency and a superior liquidity, prerequisites for co-financing the companies and the economy. The loan-to-deposits ratio is below 100%, indicating available resources for financing. Nonperforming loans have decreased more than three times, from 22% to about 6%, showing a positive trend in a healthier internal ratings model and a sound balance sheet position, while the lending dynamics for companies is below the European average. We have the potential to accelerate the access to finance to support investments as a base for economic growth, instead of a consumption driven growth. This potential is demonstrated by the low financial intermediation in Romania, around 29%, although this percentage can be misleading, as large corporations usually access financing directly abroad, from the headquarters or from the financial institutions in the countries where they are headquartered. The more prudent lending policies and the risk aversion of commercial banks are factors that could be perceived as a break in financing investments at full capacity; however there is a positive side, too. It is a safe approach to credit as a driver of economic growth, as credit (lat.
The prospect of a disintegrating monetary union is harmful for both weak and strong member countries. Weak economies experience a currency run, which in the single financial space of a monetary union translates into two phenomena: loss of value for any liability issued by domestic borrowers – including the sovereign – and a depleting deposit base for domestic banks. Here, the scramble for liquidity and the flight from bank liabilities act as a powerful shock on domestic money demand. This is a money demand shock of the worst possible kind, one which shrinks the money multiplier and puts downward pressures on domestic consumer prices. At the same time, countries perceived as safe havens are the target of significant capital inflows, which mainly take place via cross-border bank transfers. In these receiving countries, the monetary base expands. But in order to induce local depositors to hold the excess cash which they are receiving, the expected return on all the competing assets has to fall. This means that the prices of a wide range of securities and of real capital are bid up on impact. Asset price inflation looms. What is the role of the central bank which finds itself in the middle of these panic transactions? 3  Monetary policy should offset the genuine drift in the nominal scale of the economy, which measures the progressive loss of purchasing power of the currency.

It has addressed the risk that those households and firms which consume more energy as a proportion of their income and/or lack the savings or access to external finance that might help them deal with the cash-flow implications of sharply higher energy bills – in other words, less well-off households and small businesses – could not manage the dramatic energy-driven cost-of-living squeeze that threatened over the summer. The UK Government's Energy Price Guarantee (EPG) is the main vehicle here. Decisions such as these are, rightly, in the domain of the government and not for independent central banks to make. However, I will discuss the implications for our economic forecasts in a moment. But I want to flag that the MPC's most recent baseline projection published in the August Monetary Policy Report incorporated the significant increases in European wholesale gas prices we experienced over the summer, but – owing to the pause implied by changes in political leadership– did not incorporate a fiscal policy response to those increases. This reflected the MPC's usual conventions and assumptions underlying the production of its forecasts, but – in the specific circumstances faced at the time – resulted in a baseline projection with debateable internal consistency. The Committee took the unusual step of distancing itself from that baseline in August, and relied more heavily on complementary analysis in scenarios and variants in motivating its decision.
It would not be easy to reduce the central government deficit in a situation with declining oil revenues. We might, of course, be fortunate enough to experience a rise in oil prices again, so that we do not have to deal with this problem. Perhaps the oil price is abnormally low at present. But it is important to be aware that the government, in expanding welfare programmes and public sector activities, has not taken due account of the possibility that oil prices will remain low over a longer period. 15  BIS Review 20/1999  We have already witnessed a depreciation of the krone in response to the deterioration in Norway’s terms of trade. This may reflect expectations of continued low oil prices and lower revenues in the long term. This also compromises confidence in the government’s long-term financial position. It is risky to increase expenditure and reduce taxes when there is doubt regarding the long-term balance of the economy. An expansionary fiscal policy could increase uncertainty and the fluctuations in the exchange rate, and reduce Norges Bank’s freedom of manoeuvre. On the contrary, fiscal policy should be oriented to provide room for lower interest rates that can counter a cyclical downturn in an environment of stable wage and price inflation. The authorities must be very cautious about further embedding fixed long-term priorities in the central government budget.

Growth above this level leads to decreased unemployment and vice versa. But it is not just the strength of demand growth that determines the level of unemployment. Other factors, such as economic structures, are also involved and at some level of unemployment the only result of additional growth stimuli is bottlenecks and shortages. Wage costs will then rise in a way that conflicts with low and stable inflation. The GDP growth rate of 3.7% for the first half of this year accordingly exceeds any reasonable assessment of the Swedish economy’s long-term potential. For a time, however, such a high growth rate can be feasible if firms are able to recruit the necessary labour, for instance because the economy is recovering from a situation with high unemployment. That has been the case in Sweden’s labour market and pressure from wages and prices has thereby been able to remain low. Neither are any dramatic changes foreseen in respect of wages in the near future. But how long can this situation last in the present economic upswing? How far can unemployment be reduced without firms encountering recruitment problems more generally? Even with the high unemployment at present, it is, for example, already difficult to recruit computer consultants and some other occupational categories. The situation in certain segments of the Stockholm labour market is also tighter than in other parts of Sweden. But so far, the bottleneck problems seem to be fairly restricted. As yet there are no indications of more widespread shortages.
The insurance industry found itself in a position of having to defend its activities from being subjected to the same fate of the wide-ranging regulatory reform that has consumed the banking sector following the crisis. The loss of confidence in financial intermediaries has been particularly damaging. Consumer confidence and trust in financial intermediaries have fallen to all-time lows and continuing discoveries of misconduct have done little to restore confidence. Consumers are unfortunately prone to painting all intermediaries with the same broad brush and asking themselves how far they can trust their financial service providers. As a result, conduct issues are coming under significant scrutiny globally, and the expectation of professional conduct is no longer taken for granted by consumers and regulators alike. This general shake-up of the industry that followed the crisis has meant that insurance brokers, swept up in the tide, must confront the very basic ethos of their business. They must make serving the real economic interests of businesses and helping individuals secure their financial futures the heart of their business. They need to be concerned about  BIS central bankers’ speeches  1  the social and environmental impact of the business decisions that they make. And they must commit to providing a fair deal to their customers and building enduring long term relationships. The environment has become far more unforgiving of anything less.

The question that is being asked with increasing urgency is “How can the financial sector play a more significant role in supporting disaster risk reduction strategies?” Along with this focus has been a growing call for actors in the financial sector to do more to reduce vulnerabilities to climate and disaster risks, including through better analytics, professional advice, providing or supporting effective risk mitigation solutions, and by conducting their business in a socially and environmentally responsible manner. Going forward, society will be more demanding of financial service providers, including brokers, to discharge these responsibilities with much greater diligence, and those that do not are likely to bear more severe consequences. The fourth reason that insurance broking is finding itself at a critical crossroad is a more obvious one – the technology revolution. This phenomenon is hardly new and we continue to experience new technological revolutions at an unrelenting pace. The challenge is in  1  2  Swiss Re, Sigma No. 3/2014: “World Insurance in 2013”. BIS central bankers’ speeches  understanding and anticipating how evolutions such as aggregator capabilities, internetbased insurance, and big data are impacting insurance broking business models. So far, brokers appear to be taking some comfort in views expressed that technology is having the biggest impact on the more commoditised market for personal insurance lines, while brokers will continue to retain their share in the corporate insurance placements.
Other mechanisms that in certain situations can reduce the impact of monetary policy from its normal level include the banks tightening their credit standards - known as a credit crunch - because they cannot increase their credit risk exposure, for example, as a result of the capital adequacy rules. 4  BIS Review 80/2001  Following a long period of a strong expansion in credit, based on lenders' expectations of continued growth and high wealth levels, a severe downturn in the economy and falling asset prices can, for instance, lead to the banks limiting their lending due to uncertainty over the quality of their existing loan stock. With hindsight, the banks can conclude that they have probably misjudged credit risks earlier and thus lent money at an interest rate that was too low, as well as failing to reserve sufficient funds to cover future losses. Monetary policy relief can in such situations have less impact than otherwise, as the banks are not prepared to make loans even to profitable investments. To summarise, there is good reason to try to learn more about what affects monetary policy's impact, for instance, via the banks, in different situations. Developments on the financial markets over time and differences between various countries indicate that the impact on demand and inflation of a particular monetary policy measure should differ between periods and between countries.

The extent to which the banks are prepared to mortgage shares and property is of no minor significance. If the banks manage to capture the risks connected with fluctuations in asset prices in their credit risk management, this reduces the likelihood of such fluctuations also being reflected in variations in production and employment. I have mainly devoted my speech today to the role the banks play in monetary policy. Nevertheless, from what I have said it becomes clear that there are many, close links between the Riksbank's two tasks – to promote price stability and to promote financial stability. This is an area of analysis that we are endeavouring to develop further at the Riksbank. However, I shall have to return to this another time. BIS Review 80/2001  5
It includes 42 new or amended directives which have a bearing on the financial sector. Disappearing exchange rate risks … It is easy to conclude that there has been a dramatic decline in interest rate spreads between the countries that have introduced the euro, in the region of from around 5 down to 0.3 percentage points for government bonds. Some of this decline is, of course, connected with the consolidation of government finances in the EU member states, but as long as the national currencies remained, investors often also demanded a premium for managing exchange rate risk. The remaining interest rate spread can be largely explained by different credit ratings of member states in the euro area, which are carrying different baggage weights from debt previously incurred, as well as by differences in liquidity between different bond issues. The introduction of the euro has also contributed to increasing the breadth and depth of European capital markets and in any case led to almost complete integration of the part of the money market trading that is closely connected with the Eurosystem’s monetary policy transactions. To be sure, it is the quintessence of a common monetary policy that there should be uniform interest rate conditions for the liquidity supply across the entire monetary union. This has also led to an integration of deposit markets, i.e. short-term financing without formal collateral.

Not only its monetary policy, and not only in Germany. We will keep explaining to our critics in Germany – and also to German savers – that their country is one of the main beneficiaries of the euro. A stronger euro area, with inflation of below but close to 2%, would be good for Germany. As for the debate we may have from time to time with some academics in Germany, I would say there is a certain irony in them taking us to task because we are focusing on our inflation target, since it is at Germany’s insistence that the ECB was given that mandate – and that mandate only – in the euro’s founding treaties, and in my view rightly so. 2  BIS central bankers’ speeches  Did the euro’s jump after your announcement on March 10 disappoint you? It doesn’t help your return-to-inflation goal… The ECB, as you know, doesn’t have a foreign exchange target. What I saw is that financial markets in general understood what we did, which is more important than the instant reaction of forex operators. The dollar/euro exchange rate is mostly driven by different monetary policies in the United States and Europe. What would be more worrisome for us would be a further decline of emerging countries’ currencies, and increased volatility of the pound sterling due to the EU referendum debate in the United Kingdom. Does the ECB have a plan for a possible “Brexit”?
In this environment, macroprudential policies that slow the build-up of household leverage ex-ante can be  32  All speeches are available online at www.bankofengland.co.uk/speeches  32  welfare-improving in avoiding this outcome. Farhi and Werning (2016) also offer a model of macroprudential policy in the face of aggregate demand externalities. Another strand of the literature emphasises behavioural sources of pro-cyclicality. For example, powerful narratives, such as a collective belief in a ‘new paradigm’, might manifest themselves in over-exuberance in the financial system (Tuckett (2011), Shiller (2017)). Myopia about risk might also drive excessive risk-taking, especially as memories of past financial crises fade (Guttentag and Herring (1986), Herring (1998), Haldane (2009b), Gennaioli, Schleifer and Vishny (2012)). And such behaviour might be amplified by contracts that reward short-term performance excessively and by herding in financial markets (Avery and Zemsky (1998), Lakonishok et al (1992), Bikhchandani and Sharma (2001)). Aikman, Nelson and Tanaka (2015) show how reputational concerns and peer benchmarking can drive credit cycles. The case for macroprudential interventions to address build-ups in leverage also has empirical support. Mian and Sufi (2010) argue that the persistence of the decline in US GDP after the crisis was caused by excessive household leverage. Jordà et al (2013) report that credit booms not only increase the likelihood and severity of financial crises, but also make normal recessions more painful.

Clear communication reduces the risk of confusion, volatility, and spillovers, and helps others prepare for challenges that may lie ahead. Experience has demonstrated that transparency in monetary policy can both increase its effectiveness and reduce unintended consequences. Shared Insights and Analyses 1/2  BIS central bankers' speeches  That is why the perspectives we gain through ongoing dialogue with our counterparts are so valuable. Across the globe, many central banks—including the Federal Reserve—are moving to unwind the highly accommodative policies they put in place at the start of the pandemic. And we are doing this at a time when the economic implications of COVID-19 and the war in Ukraine remain highly uncertain. As we all take these steps, the Bank for International Settlements (BIS) has provided an indispensable venue for sharing insights, analyses, and concerns. By engaging with each other, we are able to stay ahead of the trends and issues that affect other economies and their financial markets. And that is true not only when it comes to policy development and execution, but also in understanding economic and financial developments across the globe. A particularly apt example of the value of dialogue is the BIS’s Consultative Council for the Americas, which I’ve had the pleasure of chairing since 2020. Agustín, Julio, Roberto, and our colleagues from Argentina, Canada, Chile, Colombia, and Mexico are participants in meetings of the Council. Suffice to say, we’ve had a great deal to discuss over the past two years.