Hunt for yield creates new risks: BoC

My posted comment to today's Financial Post article entitled: "Hunt for yield creates new risks: BoC":

Just another of the obvious "unintended consequences:" that CAITI (www, caiti, info) has been talking about since its inception in December 2006. Only took Mark Carney the better part of 5 years to realize the folly of his idiotic ill-conceived and ill-executed actions of killing income trusts ( on the totally false premises of alleged "tax leakage") and the certainty that his actions against yield hungry investors would spawn more Asset Backed Commercial Paper schemes or Manulife Income Plus near disasters to come to pass.

What a clueless idiot we have for Governor of the Bank of Goldman Sachs in the person of Mark Carnage.

Hunt for yield creates new risks: BoC

Barbara Shecter
Financial Post
Jun 22, 2011

The sort of low-interest-rate-driven risk taking that lead to the 2008 global financial crisis is on the rise and posing an increasing threat to the stability of Canada’s financial system, the Bank of Canada said Wednesday.

“The popularity of riskier securities and strategies is growing” both globally and in Canada, the central bank said in its bi-annual Financial System Review released Wednesday, highlighting the boom in lower-grade bonds that is drawing in new investors who may not be aware of the risks.

While stimulative monetary policy is needed to support the global economic recovery,” a long period of low interest rates may fuel excessive risk-taking,” the report said, noting that this risk to the system has increased since its most recent report in December.

The report highlighted the role of misunderstood investments — notably asset-backed commercial paper — in the most recent market meltdown a few years ago.

This “search for yield could cause risk to be underpriced or lead investors to take on exposures that they may not be able to manage” if the global economy falters, the stability report said.

In particular, Wednesday’s report points to the growing popularity of non-investment-grade bonds and the near historically low price of their credit risk relative to government bonds.

“It is uncertain whether all new investors have the ability to adequately manage the risks associated with these securities and investment strategies,” the report says.

The report also cited “covenant lite” loans that delay the pain of likely defaults, and complicated developments in exchange-traded funds in Europe.

Global economic issues including the high risks associated with sovereign debt continue to put pressure on financial stability, edging higher in the most recent period, according to the report which also urged “further moderation in the pace of debt accumulation” by Canadian households.

While economists at TD Bank do no expect interest rate hikes before 2013, that could change if other risks looming over the Canadian and Global landscape were to abate in the coming months. In such a scenario, “the Bank of Canada could very well start to lift rates before the year is up,” a TD report concluded.

The central bank also warned Wednesday that Canadian institutions could be put at a disadvantage in the global move to regulate derivatives, and made a strong case for a domestic solution to meet G20 commitments to stability-driven central clearing and settlement.

The bank, which is playing an active role in the country’s G20 commitments on the regulation of derivatives, highlighted risks of electing to have over-the-counter derivatives contracts cleared by central counterparties (CCPs) outside Canada.

“Global CCPs may not provide a level playing field to Canadian dealers that are smaller than the global dealers,” the report warned, adding that “offshore clearing may not provide the public sector with sufficient scope for oversight or control to mitigate and manager the effects of a financial crisis.”