Part A: Financial market

fragility

Chart A.10 Long-term interest rates remain low

International ten-year government bond yields(a)

Source: Thomson Reuters Datastream.

(a) Yields to maturity.

Chart A.11 Term premia in government bonds are low

Estimates of term premia in ten-year government bond yields(a)(b)

Sources: Bloomberg, Federal Reserve Bank of New York and Bank calculations.

(a)UK estimates are derived using the model described in Malik, S and Meldrum, A (2014), ‘Evaluating the robustness of UK term structure decompositions using linear regression methods’, Bank of England Working Paper No. 518; US estimates are available from www.newyorkfed.org/research/data_indicators/term_premia.html.(b)Estimates for the United Kingdom are calculated using data since May 1997.

Chart A.12 Advanced-economy equity prices have largely recovered after marked falls in 2015 Q3International equity indices(a)

Sources: Bloomberg and Bank calculations.

(a) In local currency terms, except MSCI Emerging Markets, which is in US dollar terms.

Chart A.13 Some international equity valuations appear stretched on some metricsCyclically adjusted price/earnings ratios (CAPE)(a)

Sources: Global Financial Data and Bank calculations.

(a)Ratio between real price and the moving ten-year average of real earnings for an equity index.(b)Long-term averages are calculated using monthly data since April 1962 for the United Kingdom and January 1938 for the United States.

Chart A.14 On 24 August 2015, implied equity market volatility reached levels not seen since 2009Highest intraday level of option-implied equity volatility of the S&P 500 index (VIX)(a)

Source: Chicago Board Options Exchange.

(a) Series shows the highest value of the VIX index on each day. The VIX is a measure of marketexpectations of 30-day volatility as conveyed by S&P 500 stock index options prices.

Chart A.15 Corporate bond liquidity risk premia have increased, but are still low given risks

Deviations of estimated corporate bond liquidity risk premia from historical averages(a)(b)

Sources: Bloomberg, BofA Merrill Lynch Global Research, Thomson Reuters Datastream and Bank calculations.

(a)Implied liquidity premia are estimated using a Merton model as in Leland, H and Toft, K (1996), ‘Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads’, Journal of Finance, Vol. 51, pages 987–1,019, to decompose corporate bond spreads.(b)Quarterly averages of deviations of implied liquidity risk premia from sample averages. Sample averages are from 1999 Q4 for € investment-grade and 1997 Q1 for £ investment-grade, US$ investment-grade and US$ high-yield corporate bonds.

Chart A.16 Proportion of companies defaulting could increase with a rise in corporate bond spreadsSurvey-estimated relationship between borrowing costs and the proportion of UK mid-sized companies likely to default(a)(b)

Sources: 2015 Bank’s Survey of major UK banks on their small and medium-sized corporate lending, Bloomberg, BofA Merrill Lynch Global Research, Thomson Reuters Datastream and Bank calculations.

(a)‘Benign macro environment’ refers to a macroeconomic environment similar to that of end-2014. ‘Harsh macro environment’ refers to a recession similar to 2008–09.(b)Based on a survey of UK banks’ (largely floating rate) lending to small and medium-sized companies. The chart includes data for mid-sized companies with revenuesbetween £25 million–£500 million only.(c) Increase in average liquidity risk premium on sterling-denominated investment-grade corporate bonds between 2007 H1 and 2009 H1 estimated using a Merton model as in Leland, H and Toft, K (1996), ‘Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads’, Journal of Finance, Vol. 51, pages 987–1,019, to decompose bond spreads.

Box 2: Investment funds

Chart A. Split of global financial assets by owner(a)

Sources: BlackRock, McKinsey Global Institute analysis and Bank calculations.

(a) Data as at 2012.(b) Includes sovereign wealth funds, foundations/endowments and family offices.

Chart B Estimated net purchases by asset managers associated with changes in the price of sterling corporate bonds(a)

Sources: BofA Merrill Lynch Global Research, Dealogic, FCA, Thomson Reuters Datastream and Bank calculations.

(a) Based on a regression of monthly net purchases by asset managers of sterling corporate bonds, against contemporaneous returns on the iBoxx sterling corporate bond index, and controlling for gross issuance of sterling corporate bonds and changes in US Treasury yields. Data from 2011–15.(b) Highest monthly increase in investment-grade sterling corporate bond yields, observed in October 2008. Data from 1997.

Chart C Fund borrowing as a proportion of net asset values(a)

Sources: Bank-FCA survey and Bank calculations.

(a) Data include 68 funds that reported borrowing, out of a total survey sample of 143.(b) Proportion of funds that reported.