25 November 2014

Financial Times: Bundesbank warns corporate debt becoming overpriced

Germany’s central bank has warned that corporate debt is becoming overpriced and threatens the financial stability of Europe’s biggest economy.

“There are signs that the search for yield is leading to exaggerations in certain market segments,” the Bundesbank said on Tuesday, adding that the effect was “clearly perceptible in the markets for corporate bonds and syndicated loans”.

Economists from around the eurozone are investigating ways to swell the ECB’s balance sheet by up to €1tn to help boost growth and inflation in the bloc. 

One idea that officials are looking at is extending the central bank’s asset purchases, currently limited to covered bonds and asset backed securities, to include corporate and sovereign debt. Many analysts expect policy makers to announce an extension in December or early next year.

But some economists and officials, including Mario Draghi, ECB president, have voiced concern that central banks’ bond buying sprees have more of an impact on asset prices than economic activity. Jens Weidmann, Bundesbank president and member of the ECB’s policy making governing council, is viewed as the staunchest objector to purchases of more public and private debt.

Claudia Buch, the Bundesbank’s deputy president who is responsible for financial stability, was cautious when asked about the degree by which corporate bonds were overvalued. “It’s always a question of probabilities,” she said.

© Financial Times