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Credit Bubble Concerns on The Edge of the Central Bank Governor

3-Apr-14
Credit Bubble Concerns on The Edge of the Central Bank Governor

In mild spring in New York, representatives from Citigroup started to introduce investors to the bank’s subprime mortgage securitization new platform.
It sounds like 2007 plucked in the credit bubble and eventually led to the scene of the height of the financial crisis; Citi’s "road show" began just this week. Bank of America is preparing to launch the market in advance from One Main Financial, its subprime consumer lending arm debut securitization.

In doing so, Citi’s goal is to break into a wave of investors from making it riskier borrowers slice and - diced loans to create demand for higher -income securities.
Plans to sell the credit market are symptomatic of broader development of the desire to increase returns, leading to concerns about possible overheating and central bankers sparked public introspection.
Each part of Wall Street's securitization machine has shifted to a higher gear , while sales of junk bonds have soared , and loans to highly leveraged companies has exceeded the level before 2008 .

"We're starting to see the accumulation of excessive speculation, which is more advanced American and start coming through in Europe,” said Chris W. Lin, chief market strategist at Longview Economics said.
Central bankers have debated whether monetary policy should take into account the asset bubble since at low interest rates, Greenspan was accused of training grazing investor before entering the high-risk investments in 2008.

However, in recent months, the debate has become increasingly public credit markets continue upward trajectory.
Many members of the U.S. Federal Reserve Board, the central bank should not take the risk, the potential for market overreaction to derail long-term economic growth, some people think the opposite.

Daniel Tarullo, Federal Reserve Board governor and his top banking regulator, in February said the central bank should retain the use of monetary policy to combat a potential bubble options.
Jeremy Stein, Mr. Tarullo's board colleagues that late last month, the central bank should incorporate risk into their financial stability of monetary policy. He added that the Fed should consider raising interest rates in the bond market when the so-called risk premium estimate is unusually low.

Mr. Stein’s speech before a few days, one such measure the risk premium has fallen to the lowest level since early 2007. The difference between high-yield bonds and 10-year U.S. Treasury Bank of America Merrill Lynch index, or between "communication”, fell to 291 basis points - not far from the 2007 record of 288 basis points.

"This is where one can enter the relevant bubble spots and whether the Fed can be expected to be more difficult to resolve the controversy smarter than other market participants, " Mr. Stein said in his speech.
For bankers, to use its powers to the central bank's tightening market bubble idea is more than theoretical. They believe that by the regulatory agencies, the Federal Reserve issued guidance on leveraged loans last year, including about reining in the same market are too high, because it is about ensuring that banks do not make overly risky loans.

"They're trying to ensure that any leveraged loans held by banks are safe, “one banker’s major lenders. " But obviously the second main reason is to curb the market because they want to bring the wind to perceive credit bubble."
According to market participants, the guidance has not been significantly affected.
Banks sell $ 161.8bn worth of leveraged loans in the first quarter of 2014, according to data of the S & P Capital IQ. This is following the sale of $ 189bn in the same period last year, but still one of the highest quarterly levels ever recorded in the region.

“It affects [personal bank] behavior, but I do not know if it affects the market, “said the banker.” If there is a significant imbalance between supply and demand for any type of product, it will find that people who have it from a guy who want it the way it guys - it just going to be transferred to non-regulated areas."

A document in 2014 to prepare the U.S. monetary policy forum pointed out the risks faced by financial stability may occur even outside of the big banks, prompting further discusses how regulators should be close to financial stability.
Message that the file was later Mr. Stein who warned that echoes “- as well as other similar vehicles - Rapid growth in fixed income funds bear careful watching.”

According to the figures of the document, according to Morningstar data, investors around the world are devoted almost $ 2TN fixed income funds between 2008 and the beginning of April 2013, food shortage $ 500 billion into the stock.
"Factor about fixed income markets have an underestimation in the field of discussion is mobility , said:" Michael Fredericks , a portfolio manager at Black Rock , which means that investors may find it difficult leaving their location should sell over rising interest rates triggered the credit .

For some analysts believe, is removed from the current sales of sub prime mortgages bundled responsibility, the problem is very simple, when the credit markets will become - not if.
" It feels like getting the credit cycle is on borrowed time, “Hans Lorenzen, credit strategist at Citigroup, said in a report this week.