risks to growth can be expected to increase the attractiveness of risk - free assets ( gilts ) relative to riskier assets ( equities ). see vlieghe, g ( 2017 ), ‘ real interest rates and risk ’ ; also broadbent, b ( 2014 ), ‘ monetary policy, asset prices and distribution ’ ; this might reflect that the sterling investment - grade corporate bond index includes a significant amount of issuers that are not uk - based and therefore not necessarily uk - focused. but internal analysis suggests that in recent years the spreads on sterling corporate bonds issued by uk - focused companies have tended to track the broader sterling investment - grade corporate bond market. all speeches are available online at www. bankofengland. co. uk / speeches it seems unlikely that rates can be so persistently low without either weaker growth prospects or more uncertainty. in london ’ s west end office markets, the picture is particularly stark. even if the magic combination of persistently low rates and historically typical rental prospects comes true, valuation methodologies similar to those being developed by the industry point to prices 10 % below today ’ s level. precisely why these markets have become stretched is impossible to know for sure, but i ’ d caution against placing too much weight on monetary policy as the primary or underlying explanation. a range of underlying forces have driven down natural rates of interest, including demographics, perceived downside risks, expected productivity growth. monetary policy may have been a prominent actor, but it was reading a script set by these economic forces. that script has meant that the size of the global stock of bonds yielding more than 4 % has fallen to only about $ 2trn ; in 2007 it was $ 16trn. in that environment it may be just too tempting to succumb to the illusion that a higher yielding asset isn ’ t a higher risk asset. after all, recent performance has been good. corporate insolvencies have been close to pre - crisis lows and, of course, interest rates have been low and stable for very many years. this ‘ reach for yield ’ explains why fixed income investors have been prepared to take on more risk to get returns just a little closer to what they had been used to. it helps to explain why compensation for risk on higher - yield bonds has fallen relative to that on investment grade bonds, which in turn has fallen relative to the return on safe assets. regardless of what caused the stretch, we need to address the question of

some cases, this general behaviour is an explicit investment strategy : some investment funds explicitly try to keep the implied volatility of their portfolio at a fixed level. see the market monitor of the office of financial research for the second quarter of 2017 : ‘ the volatility paradox : tranquil markets may harbour hidden risks ’. all speeches are available online at www. bankofengland. co. uk / speeches we need to keep pace. and investors should too. accidents can be avoided if driving speeds are based on the road conditions ahead rather than the price of insurance. ii ) liquidity mismatch in corporate bond markets the second development raising questions about market resilience is actually a combination of two changes in recent years. first, market - makers ( ‘ dealers ’ ) have become less active in their market making. this matters because they play an important role in warehousing bonds between the time a seller wants to sell and the point at which a willing buyer can be found. our research suggests that, in response to asset sales by bond funds, dealers are less willing to see their inventories of corporate bonds increase. the flipside is that market prices respond more to asset sales than they did, to draw in buyers in a short timeframe. post - crisis limits on bank leverage may be a driver of this. if so, then a generally lower level of market - making activity may be the price paid for greater resilience of systemic institutions and their critical activities. the issue is not whether or not to row back on those regulatory standards, it ’ s to make sure the system adapts fully to corporate bond markets being generally less liquid and able to absorb asset sales. in that context, the second development is the growth in the share of corporate bonds held in open - ended mutual funds, particularly those offering the possibility of redemption at just one day ’ s notice. the share of corporate bonds held in open - ended funds in the uk and the euro area has increased by 70 %, and in the united states by 150 %. the question here is whether structures with the shortest redemption notice periods could create a ‘ first - redeemer advantage ’ that encourages greater asset sales during market adjustments. why might that be a possibility? typically investors are offered the ‘ net asset value ’ ( nav ) of the fund when they redeem. this is calculated on market prices for the assets held in the fund. but the market prices of some assets are based - implicitly - on