– where the absence of, or break with, past regularities, such as the relationship between slack and inflation, may imply a long transition phase to a new steady state. 9 worse, if the beliefs i just mentioned guide our actions, then low growth or low inflation can be the result of self - fulfilling pessimistic expectations and can lead to so - called “ stagnation traps ”. 10 the second, related, factor is that the nature of the uncertainties we face today may have changed compared with the pre - crisis period. for example, barbara rossi and co - authors find that while risk fell sharply after the great financial crisis, knightian uncertainty – situations in which people might be unable to assign correct probabilities to future outcomes – remained persistently high even after the end of the crisis. 11 in these cases, investors still have to make a decision, and judgement – often based on current observables – is usually the only basis they have. whatever the ultimate reasons, does it matter if the inflation risk premium is low? there are two sides to the discussion. from a monetary policy perspective, what matters most is that inflation expectations remain at levels consistent with price stability. at the margin, a low inflation risk premium is positive as it signals increased confidence in the central bank ’ s ability to achieve its inflation aim. but from a financial stability perspective, and here i again refer to previous work presented in the ecb ’ s financial stability review, a low inflation risk premium may be a matter of concern if it indicates complacency about future adjustments. 12 in this case, a reappraisal of investors ’ view about future risks to global inflation may cause a correction of global risk premia, in particular in an environment of historically low volatility, as you can see on my next slide. oil prices may be a potential catalyst. ecb internal research finds that energy price shocks have become considerably more persistent lately, which could fool investors into believing that they are bound to stay at current moderate levels in the foreseeable future. incidentally, as oil prices moved higher in recent weeks, the inflation risk premia also rose amid an increasing willingness on the part of investors to hedge against inflation in an environment of strongly declining deflation probabilities. this is also consistent with survey - based evidence. for example, a recent survey of 62 fund managers by bank of america merrill lynch revealed that a rise in inflation is thought to be the most under

january 2017 levels and we wouldn ’ t be having a discussion about flattening. us long - term yields have resisted upward pressure only because of a considerable re - compression of the term premium. only shortly after the uk ’ s referendum on eu membership in summer 2016 was the us ten - year term premium more negative than it is today. this allows for one preliminary conclusion but begs one question. the conclusion is that markets seem sanguine about the prospects for the us, and probably also for the global, economy. judging from the average expected short - term rate over the next ten years, the markets appear to have shaken off some of the pessimism that caused them to tread very carefully over the past few years. past and currently expected policy rate changes are predicted to last. this also means that the flattening of the us yield curve is unlikely to signal a looming recession, as it may have done in previous business cycles. the question, then, is what has caused the us term premium to fall to such an extent since the start of last year. in answering this question, i will distinguish between two broad factors. the first relates to international portfolio rebalancing considerations and the second to investors ’ views of the risks surrounding the medium to long - term inflation outlook. international capital flows and long - term yields i have already examined the first factor in other speeches. 3 today i would like to shed some more light on the direction and extent of cross - border spillovers that might currently contribute to keeping long - term yields compressed. to recall, from mid - 2014 onwards we observed a striking turnaround in capital flows in the euro area from net inflows to net outflows, just when the ecb had announced its first credit easing package and when expectations were gradually growing among market participants that we would also soon begin purchasing government bonds. you can see this on my next slide. since then, capital outflows have remained substantial, peaking at nearly 5 % of euro area gdp. what has happened is that bond investors, both inside and outside the euro area, have 2 / 7 bis central bankers'speeches rebalanced their portfolios, moving out of euro area debt securities and into the closest substitutes – bonds issued by the safest sovereigns outside the euro area. and within that asset class, most market participants have rebalanced their portfolios towards us treasuries and government agency bonds. this confirms that the portfolio rebalancing channel has been