Bank official: Bond bubble is the biggest threat to financial stability

OUTSPOKEN Bank of England official Andrew Haldane warned yesterday that the bursting of a bond bubble is the biggest threat to the world’s financial stability.

Haldane, the Bank’s executive director of financial stability, told the Treasury Select Committee that central banks’ massive asset-buying programmes have created significant risks.

“If I were to single out what for me would be the biggest risk to global financial stability right now, it would be a disorderly reversion in government bond yields globally,” Haldane told the MPs.

“We’ve intentionally blown the biggest government bond bubble in history. We need to be vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted.”

Yields on government bonds have been climbing of late, with many investors wary of a potential slowdown in quantitative easing (QE) programmes. The yield on 10-year UK gilts was 1.65 per cent on 1 May, yet has risen to 2.14 per cent.

Specifically, it is feared that the US Federal Reserve could be set to taper its latest bout of QE. Funds are flowing out of emerging markets as a result, prompting central banks to step in.

Bank Indonesia yesterday lifted its deposit facility rate by 0.25 percentage points to 4.25 per cent and said it could take other measures to defend the rupiah.

And India’s central bank intervened in currency markets to lift the rupee off record lows.

The Brazilian real has halted its steep decline after its central bank stepped in.

Banking lending decisions are improving – but business needs to play its part