Central bank purchases of government bonds make for a dangerous combination of monetary and fiscal policy. The central banks are becoming the euro-area countries’ biggest creditors. For a significant share of sovereign debt, government financing costs have become decoupled from capital market conditions.
These developments have re-energized our domestic financial markets. To a major extent, the phenomenon is being driven by global liquidity conditions, relatively benign global capital markets and generally stable world economic conditions. These factors have made international investors more willing to look at a broader array of investment opportunities, outside of the traditional favorites.