December 2013 Quarterly Review: Low rates boost credit markets
8 December 2013
Easy money continued to drive financial markets. Searching for yield, investors extended credit to riskier firms at progressively lower rates and on looser terms. But banks, especially in the euro area, struggled further to regain the market's confidence.
The Fed's hint that it might "taper" its asset purchases was followed by a sharp fall in cross-border credit to some large emerging market economies.
Daily turnover in the global FX market reached an all-time high of $5.3 trillion in April 2013. Non-dealer financial institutions are playing a more active role, as Dagfinn Rime (Central Bank of Norway) and Andreas Schrimpf (BIS) show.
Monthly FX market turnover has fallen since the Triennial Central Bank Survey in April 2013, report Morten Bech and Jhuvesh Sobrun (BIS).
OTC derivatives turnover has soared in emerging markets since 2010. Torsten Ehlers and Frank Packer (BIS) find that emerging market currencies are increasingly traded offshore.
Turnover in the OTC interest rate derivatives market has continued to grow despite low and stable interest rates, but much more slowly than before the crisis, report Jacob Gyntelberg and Christian Upper (BIS).
Summaries of individual chapters
After a summer swoon, bonds and stocks in advanced economies bounced back on the view that the Fed would continue with the current pace of asset purchases and low policy rates. Yield-seeking bond investors made it easier for firms to obtain cheap credit on loose terms. At the same time, struggling to regain the market's confidence, banks faced higher borrowing costs than non-financials with a similar credit outlook. While this cost gap narrowed more recently, especially in the United States, it kept upward pressure on lending rates. This prompted large non-financial firms to tap the debt markets directly, leading to a noticeable increase in corporate bond issuance.
Cross-border claims of BIS reporting banks declined in the second quarter of 2013, after remaining stable in the previous quarter. Reporting banks cut their cross-border lending to all sectors. Previously, lending to non-banks had risen as claims on banks had fallen.
The Fed's communication that it might "taper" its asset purchases was followed by a sharp fall in cross-border credit to some large emerging market economies, particularly in Latin America.
Demand for higher-yielding assets supported robust issuance of international bonds in emerging market currencies, such as the Brazilian real, Chinese renminbi and Mexican peso.
Market values of OTC derivatives fell despite larger notional amounts outstanding as swap rates in major currencies increased in the first half of 2013. At the same time, gross credit exposures, which provide a better measure of counterparty risk than market values, increased by 8%.
Financial factors generally become a bigger driver of FX turnover as per capita income increases. This tendency is confirmed by updated research on the relationship between a country's income, foreign trade and derivatives turnover.
Special issue on global FX and OTC derivatives markets
The remaining articles in this issue of the BIS Quarterly Review analyse recent developments in global FX and OTC derivatives markets using data from the 2013 Triennial Central Bank Survey, from which additional data are released together with the BIS Quarterly Review.
Trading in the FX market reached an all-time high of $5.3 trillion per day in April 2013, up by more than one third on 2010. Dagfinn Rime (Central Bank of Norway) and Andreas Schrimpf (BIS) find that non-dealer financial institutions, including smaller banks, institutional investors and hedge funds, have become the FX market's largest counterparty segment. Inter-dealer trading has continued to lose market share, as higher concentration has allowed top-tier dealers to match more trades internally. The once clear-cut divide between inter-dealer and customer trading has faded. That said, top-tier dealers have retained their important role in the market as prime brokers.
This special feature by Morten Bech and Jhuvesh Sobrun (BIS) looks at trading activity in the foreign exchange market between the 2010 and 2013 Triennial Surveys and in the following months. The authors estimate that the $5.3 trillion per day reported for April 2013 was a peak, with activity falling to $5 trillion per day in October, led primarily by a drop in spot transactions.
Derivatives markets in emerging economies have continued to grow since 2010, driven mostly by the OTC segment. Torsten Ehlers and Frank Packer (BIS) find that emerging market currencies are increasingly traded offshore. Trading of emerging market currencies moves together with the size of cross-border financial flows.
Low and stable interest rates post-crisis went hand in hand with low but still positive turnover growth in OTC interest rate derivatives in most currencies. Jacob Gyntelberg and Christian Upper (BIS) attribute this increase to a larger volume of contracts with financial institutions other than dealers. The share of inter-dealer trades has shrunk to 35%, the lowest level since the Triennial Survey began. Despite rapid growth in emerging market currencies, trading is still concentrated in major currencies and financial centres. New regulation has led to more contracts being centrally cleared.
* Signed articles reflect the views of the authors and not necessarily those of the BIS.