Report
Patrick Artus

What will happen when risk aversion declines if central banks want to keep long-term interest rates at zero or at very low levels?

Once a solution (vaccine, effective treatment) to the health crisis is available, risk aversion will decline , but central banks in OECD countries will probably want to keep long-term interest rates very low to stimulate demand and speed up the return to full employment. This strategy will actually be inevitable, given central banks' choice of yield curve control (Japan) or average inflation targeting (United States, euro zone). But if risk aversion declines, there is no reason for economic agents to accept to hold low-risk bonds with zero yields, which are riskier than money. We should therefore expect a massive switch to riskier higher-yielding assets (risky corporate - High Yield - bonds, equities, real estate) at the expense of risk-free bonds. This means that if central banks want to keep risk-free bond yields at zero, a fall in risk aversion will lead to an increase and not a decline in central bank purchases of bonds, and therefore to an increase in the size of quantitative easing.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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