Federal Reserve Flags Downside Risks To Asset Valuations

The United States Federal Reserve flagged the vulnerability of asset prices to significant declines, following the steady increase in several markets since November.

• Long-term Treasury security yields have climbed to pre-pandemic levels in recent months, but remain low compared with historical ranges as risk compensation measures were implemented.
• In its latest Financial Stability Report, the Fed said asset valuations may be vulnerable to lower risk appetite, failure to contain the COVID-19 pandemic, or a stall in recovery.
• Economic segments such as energy, travel, and hospitality are more sensitive to developments related to the pandemic.
• Bond equity market indexes hit record highs in the recent months, while corporate bond and leveraged loan yields have remained at low levels on historical standards.
• The interest rates have been kept at record lows, but the Fed said downside risks remain such as the record growth in mortgage loans, and uncertainties on repayment.
• Farmland prices continue to be on an uptrend versus rents and incomes, on the back of cheaper mortgage rates.