But over time, if monetary policy continues to withdraw long-dated safe collateral from the market, there is a risk that it has a countervailing effect – i.e. that it exacerbates safe asset hoarding at the long end of the yield curve. As various academics have documented 2, this could eventually put further downward pressure on real equilibrium rates.
Central banks have responded to this by re-lending their portfolios of securities. But this is only a temporary fix. The first best solution would clearly be for fiscal issuers to generate more safe assets under the conditions outlined above. If this does not happen, central banks may have to use their own balance sheets to satisfy safe asset demand, also at longer maturities.