In its latest quarterly review, the Bank for International Settlements (BIS) reported that despite lingering risks, investor optimism about the near-term outlook set the tone for financial markets during the review period, which spans September 7 to December 2 2024.
The global economy seemed to be heading for a smooth landing, and the results of the US presidential election were conclusive. As a result, stock markets rose and credit spreads narrowed, easing global financial conditions. At the same time, rising government bond yields and an appreciating US dollar tightened them, pulling in different directions. Measures of risk premia and volatility ticked up in bond markets, amid signs that investors were pricing in higher fiscal and (geo-)political risks. However, the markets for risk assets mostly shrugged off these uncertainties and sentiment remained positive on balance.
Government bond yields generally rose, especially in the United States. The economy’s strength there continued to surprise on the upside, pushing Treasury yields higher despite two consecutive policy rate cuts. More subdued activity in Europe meant that expectations of future rates were mostly unchanged and yields rose by less. Japanese government bond yields edged up as the Bank of Japan continued on its gradual path of policy normalization. Rising US yields went along with a surge in the US dollar, a trend that intensified in the wake of the election.
The report highlighted the following key takeaways:
- Rapidly rising US yields and a soaring US dollar set the tone for fixed income and currency markets. Moves in other core bond markets followed a similar but more muted path, reflecting diverging macroeconomic conditions across regions.
- Risk-taking continued to be buoyant in equity and particularly credit markets, as investors largely shrugged off (geo-)political risks.
- Emerging market economies (EME) financial conditions tightened, with higher bond yields, declining equity markets and headwinds posed by a stronger dollar.
In a media briefing, Claudio Borio, head of the Monetary and Economic Department at BIS, said that while leverage positions are in check, the fiscal outlook is increasingly worrying and there is a growing discomfort of absorbing supply of government debt. Moreover, repo rates and collateral pricing are edging up.
“Sovereign debt is…one of the biggest, if not the biggest, threat going forward in the global economy,” Borio said in the media briefing.
Among the topics in the review were large language models (LLMs) for economists and monetary policy related to housing supply elasticity.