The challenges posed by low interest rates

More than ten years after the most serious post-war financial crisis, it is clear that the economy and the global financial system remain vulnerable. Certainly, the unconventional monetary arsenals deployed massively by the major central banks of developed countries have been very useful, but this offensive quantitative easing strategy is not without risks for finance and the real economy. In fact, at the end of January, the International Monetary Fund (IMF) expressed concern about the economic slowdown in advanced countries and China, as well as the high volatility of the stock markets. More recently, the OECD (Organization for Economic Cooperation and Development) published figures on debt, which is constantly increasing. Thus, between 2007 and 2018, the debt-to-GDP ratio rose from 49.5% to 72.6% in OECD countries. New sovereign bond issues will exceed 2 trillion this year. At the same time, the reduction in asset purchases by central banks should complicate government financing conditions. On the corporate side, it is not much better, given their risk profile that is higher than that of states. Thus, again according to the OECD, the global stock of bonds issued by non-financial corporations reached a new record, approaching the threshold of 13 trillion dollars at the end of 2018. And on this front, the situation is fragile according to the multilateral institution based in Paris:

“The share of investment grade bonds of the lowest quality is 54%, which is an historic peak, and bondholders' rights have declined significantly, which could amplify the negative effects of potential market tensions. In addition, in the event of a financial shock similar to that of 2008, $500 billion in corporate bonds would migrate to the speculative asset market within a year, representing forced disposals that investors in this market would have difficulty absorbing.”

Faced with its growing concerns, the rise in interest rates, already in force in the United States and expected in Europe at the end of the year or now rather next year, could create additional disruptions. In this delicate context, scientific research can provide answers and recommendations for regulators and actors in the sector. Moreover, the 2019 edition of the International Financial Risk Forum, organized by the Louis Bachelier Group, is devoted to the low interest rate environment. During this event, academic researchers from around the world and financial professionals discuss how to improve industry practices in order to limit risks and find opportunities. To echo this, this new issue of Cahiers Louis Bachelier provides the analyses of five researchers, specializing in interest rates and systemic risk, who provide particularly interesting explanations for understanding the current situation and especially trying to anticipate future movements.

Happy reading!

Jean-Michel Beacco,

General Delegate of the Louis Bachelier Institute

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