| LONDON, June 23
LONDON, June 23 Rising bond yields pose the
biggest risk to financial markets, according to leading central
banks, encouraging them to invest more of their record amounts
of international reserves in equities, a survey showed on
But far from signaling an increase in risk appetite, this
continued expansion into equities reflects a desire to diversify
portfolios, generate returns and avoid losses on bond holdings
if fixed income markets do start to sell off later this year.
The reserve managers surveyed were "generally bearish across
most asset classes," in the face of a potential rise in yields,
and given that most assets have posted stellar gains over the
past year, supported by waves of central bank liquidity.
The annual survey, conducted by Central Banking Publications
last month and sponsored by HSBC, drew on responses from 69
central banks with a combined $6.7 trillion in reserves, some 57
percent of all reserves. The average holdings of the respondents
was $97 billion.
Over half of the respondents, holding reserves worth $3.1
trillion, ranked rising yields as the most significant risk.
Almost two thirds ranked it as either the most or second most
"Given the impending normalisation of monetary policy among
the developed economies, particularly in the U.S. and UK,
reserve managers are very concerned about mark-to-market losses
to be incurred by holding fixed income assets," said one Asian
Rising bond yields and falling prices are worries for
central banks, who usually put the lion's share of their
reserves in fixed income assets.
Almost 60 percent of respondents said the U.S. Federal
Reserve's policy of reducing its stimulus would affect how they
manage their reserves. That could include diversifying
portfolios away from emerging markets and into U.S.
dollar-denominated assets and buying shorter-dated bonds instead
of long-term assets.
Nineteen central banks invest in equities or might in the
next five years, compared with 14 in last year's survey. Only 11
respondents, or 16 percent, ruled out equities completely,
saying their mandates didn't allow it, stocks were too volatile
or were only for central banks with "excess" reserves.
Although only a few of the central banks surveyed invest in
exchange-traded funds (ETFs), "there is considerable latent
support for them as an asset class," the report said.
More than half the respondents, with $3 trillion of
reserves, said they could envisage equities or ETFs being part
of their portfolios.
That said, central banks were generally split down the
middle on whether equities are a more attractive asset class now
than they were a year ago.
The biggest shifts in positive sentiment were seen in
A-rated government bonds and in deposits. Fifty-nine percent of
the respondents said they are more attractive now than they were
a year ago. Sixty-one percent of those surveyed said the same of
On the other hand, 84 percent said hedge funds are less
attractive now than they were a year ago. Seventy-seven percent
gave the same verdict on commodities and mortgage-backed
The prospect of rising U.S. bond yields has greatly enhanced
the appeal of the dollar, with 79 percent of respondents saying
the dollar looks a more attractive currency now than it did a
Over 70 percent expressed the same sentiments towards
sterling, for similar reasons. Two-thirds of respondents said
the Chinese renminbi was more attractive because of the relative
strength and growing influence of China's economy.
"In a challenging global environment, the survey highlights
a number of significant trends across the sector including
continuing diversification of assets and currencies, and
particularly a growing interest in investing in the renminbi,"
said Christian Deseglise, global head of central banks and
reserve managers at HSBC, the sponsors of the survey.
The prospect of further monetary easing by the euro zone,
Japanese and Swiss central banks clouded the central banks' view
of the euro, yen and franc. Almost two-thirds said the euro was
less attractive than it was a year ago. More than 80 percent
said the same about the yen and franc.
The lending of central bank securities appears to be picking
up, with around two-thirds of respondents saying they either
lend out their assets or are considering it.
(Created by Jamie McGeever; Editing by Larry King)