sabine mauderer : structural changes in financial markets and implications for monetary policy implementation speech by dr sabine mauderer, member of the executive board of the deutsche bundesbank, at the dz bank international capital markets conference, frankfurt am main, 29 august 2019. * * * welcome & introduction ladies and gentlemen, welcome to the bundesbank ’ s regional office. it ’ s a real treat for me to speak to you today. “ when the going gets tough ” – this conference title was wisely chosen by dz bank earlier this year. looking at the latest ructions in financial markets, the going has already got tough. “ navigating the challenges ” is the order of the day, and not just for market participants. the same goes for policymakers – especially when it comes to fiscal policy or monetary policy. as far as central banking is concerned, “ navigating the challenges ” is broad in scope. it includes drawing the right conclusions from financial market signals. the relationship between monetary policy and financial markets is not a one - way street. stock and bond prices reflect expectations on future growth and inflation, but also on monetary policy. these market expectations, in turn, provide valuable information for policymakers. but things have become even more multi - layered. on the one hand we face increasing market complexity and changes. on the other hand we see new players, products and trading patterns. to be honest, keeping tabs on the relevant changes is anything but easy. we have to keep asking ourselves which elements of change have an impact on monetary policy and which do not. so what i am going to do is present some of these changes in the first part of my speech. it would be a bit of a “ long shot ” to always call them “ structural ”, since their longevity is not entirely clear. then i ’ ll use the second part of my remarks to point out what these changes mean for monetary policy implementation. admittedly, i´ll give you rather a rough sketch than a finished painting, so some items might be left unresolved. fortunately, we will have the opportunity to delve a little deeper into some of the issues later on tonight. but for starters, let ’ s take a look at my selection of recent changes in financial markets. a – structural changes in financial markets 1 / 5 bis central bankers'speeches i based my choice of changes on how strongly they impact on market dynamics. the first change is a shift in the relative importance

some time now, but they have been attracting renewed interest in the current low yield environment. let ’ s not forget that there are also other players with more explicit links to volatility. these include commodity trading advisors ( ctas ) with momentum - driven strategies ; 2 / 5 bis central bankers'speeches funds that have volatility targets or ( so - called ) volatility caps and risk parity funds. many of their approaches rely on systematic investment strategies. these strategies promise outperformance or superior risk management by eliminating human bias. they largely lean on automated market data analysis. but they also imply correlated investments. when volatilities are low, the strategies systematically increase riskier investment positions, and vice versa. here too, procyclical influence on market liquidity is a central concern. one factor which many, if not all, of these developments have in common is the relentless drive towards digitalisation. big data, machine learning and artificial intelligence have become indispensable for many market participants in the fields of forecasting, investment management and trade execution. so in a nut shell, we see a lot of changes in the market. these changes will alter the information that is being sent to us. the overall question is how are we going to interpret these signals? just think about traditional benchmark rates and also the shape of the yield curve. no matter which yardstick is taken : a superficial reading may suggest that the us yield curve is sending strong warning signs about growth and inflation expectations. in the same vein, the economic outlook implied by the bund curve seems to look only marginally better. for all the concerns which the yield curves continue to attract, there are many voices pointing to special factors which dilute the reliability of this indicator. increasing demand for high quality assets seems to play an important role – be it from largescale institutional investors, market participants in need of collateral, or banks aiming to satisfy regulatory requirements. the dampening impact of monetary policy on term premia is often mentioned as an influence factor as well. i will come back to this point shortly. turning to other segments, reliability concerns have also cropped up surrounding market - based inflation expectation indicators such as inflation swaps. i will not go into an in - depth analysis, the jury is still out on what has been driving down longerterm market indicators. all the related issues are being continually reassessed by the eurosystem1. another challenge is to correctly interpret vol