An abundance of liquidity in global financial markets, although its rate of growth has moderated, together with very high saving rates in some emerging market regions relative to domestic investment opportunities partly explain why long-term interest rates and credit spreads have been remarkably unperturbed by the shift to less accommodative monetary policies in the G3 economies and the resulting withdrawal of global liquidity.
Rising short-term interest rates have instead produced flatter, or inverted, market yield curves in the six months following the finalisation of the June 2006 FSR. [see chart on the left of slide 4] The renewed “conundrum” of low long-term government bond yields seems, in part, related to very low risk premia.