To: Haim R. Branisteanu who wrote (105316 ) 3/29/2014 5:07:01 AM From: elmatador Read Replies (1) | Respond to OECD sees central banks unwindingFinancial markets may be facing periods of "considerable turmoil" as central banks in developed economies prepare to reverse the stimulus programs they put in place in the wake of the 2008 financial crisis, the Organisation for Economic Cooperation and Development warned Friday. In its annual report on government borrowing, the Paris-based research body said the agencies responsible for selling government bonds will have to cooperate closely with central banks to ensure that the exit from those programs is as smooth as possible. But it said both sets of institutions face huge challenges in communicating their intentions to investors without triggering a sharp rise in government bond yields and other forms of harmful volatility in asset prices. The OECD said that as a result of its stimulus programs, the US Federal Reserve held $US2.15 trillion of Treasury bonds as of November 2013, while it expects the Bank of Japan to hold 190tn yen ($US1.86tn) of Japanese governments by the end of 2014. The Bank of England has purchased 375bn pounds ($US622.91bn) of UK government bonds. Central bankers have yet to decide what portion of those holdings they will sell, and over what time period. The OECD said bond sales by central banks are likely to take place when the borrowing needs of governments remain high, with the result that interest rates will rise. But it said that the reaction of investors to recent moves by the Fed to taper its stimulus program highlight the risk that rates will move earlier and more sharply than policy makers would wish, possibly damaging the economic recovery. "Expectation about imminent exits could...rock government securities markets by pushing up longer-term rates in government bond markets more strongly than desirable or warranted," the OECD said. The research body said investors may react to announcements of central bank policy changes by anticipating subsequent moves, leading to a tightening of monetary policy before that is appropriate to the state of the economy. "There is an apparent gap between the reality of investors seeking to price final destinations on the one hand, and the desire of central bankers to minimise the scope for disorderly shocks, on the other," the OECD said. "Central banks are facing extraordinary expectation-formation challenges." The research body said that given the novelty of tapering and the reversal of stimulus programs, it may not be possible for central banks to announce policy changes without prompting turbulence in financial markets. In order to minimise market disruption, central banks, governments and debt management agencies should work together to communicate their intentions as clearly as possible. "Failure to do so may not only affect adversely the credibility of the overall monetary and fiscal exit strategy, but it may also prompt a return to dysfunctional markets, including higher stress in inter-banking markets and sovereign debt markets," the OECD said. The report noted that in response to increased borrowing needs and uncertain market conditions, debt management agencies have become more "opportunist" in recent years, selling bonds when they can and outside a pre-announced timetable. The OECD said that will have to change as part of the unwinding of stimulus programs. "A transparent debt management framework and a strong communication policy are instrumental in reducing the type of market noise that can unnecessarily lift borrowing costs," it said.
