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Fed Warns: “Asset Valuation Pressures Have Increased”, “Leverage Remains Elevated”

Tuesday, February 14, 2017 11:39
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(Before It's News)

It is a long-running Fed tradition to quietly incorporate material warnings (deep within) about asset prices in the semi-annual Monetary Policy Report submitted as part of the Chair’s congressional testimony, and it did not disappoint this time either, when it made the following warning: “Nonfinancial corporate business leverage has remained elevated by historical standards even though outstanding riskier corporate debt declined slightly last year. In addition, valuation pressures in some asset classes increased, particularly late last year.

And elaborated:

Nonfinancial corporate business leverage has remained elevated by historical standards, and household borrowing has increased modestly, leaving the household debt-to-income ratio about unchanged. On balance, the ratio of aggregate nonfinancial credit to gross domestic product (GDP) has moved up a little in recent years to about its level in the mid-2000s but remains well below its recent peak. Valuation pressures in some asset classes have been rising, particularly late last year.

Asset valuation pressures have increased, on balance, since mid-2016, along with several indicators of investors’ risk appetite. Although yields on Treasury securities and term premiums increased as market expectations about future growth shifted higher in the fall, they both remain low. In addition, the spread of yields on corporate bonds over those on comparablematurity Treasury securities narrowed. Estimates of risk premiums in equity markets also declined. Outstanding riskier corporate debt edged down over the past year, but gross issuance of leveraged loans was strong and the share of bond issuance rated B or below remained in the fourth quarter at the high end of its range over the past few years.

Commercial real estate (CRE) valuations, which have been an area of growing concern over the past year, rose further, with property prices continuing to climb and capitalization rates decreasing to historically low levels. While CRE debt remains modest relative to the overall size of the economy and the tightening in bank lending standards for CRE loans in the second half of last year may reflect some reduction in the appetite for CRE lending, the heightening of valuation pressures may leave some smaller banks vulnerable to a sizable CRE price decline. Also, residential home prices continued to rise briskly through November.

Of course, considering that we are now nearly two years, and 300 points higher, after Yellen’s May 2015 warning that “I would highlight that equity market valuations at this point generally are quite high,” adding that “there are potential dangers there”, expect the market to fully ignore today’s warning too.



Source: http://silveristhenew.com/2017/02/14/fed-warns-asset-valuation-pressures-have-increased-leverage-remains-elevated/

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