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null The Risk of the Risk-free Asset: Can Rising Rates and Balance Sheet Reduction Cause Ten-year Bond Yields to Skyrocket?

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The Risk of the Risk-free Asset: Can Rising Rates and Balance Sheet Reduction Cause Ten-year Bond Yields to Skyrocket?
04 Feb 2022
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Clock 15 mins.
CATEGORIES: AER Global AER Personal Global Monetary Policy
ANALYSTS:
dot
Leopoldo Torralba
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Ignacio De la Torre
Following the tightening rhetoric exposed by the Federal Reserve Bank over the past few weeks and by the European Central Bank, whose tone has been somewhat more intense since last week, in this note we analyse the potential impact that a hypothetical future balance sheet reduction by central banks could have on the sovereign bond. The value of the paper lies in the great importance of the expected sovereign bond yield when making investment and borrowing decisions. Thus it is relevant for all types of agents.
dot Why is the yield on the ten-year sovereign bond so relevant?
dot What is the expected impact of the Federal Reserve's recent announcement that it will begin to shrink its balance sheet in 2022?
dot How do we expect the European Central Bank to act?
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