User:Nick Gardner /Sandbox: Difference between revisions

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<references/>
<references/>
And secondly, they have driven among investors a ferocious search for yield – a desire among
:::::::{|class="wikitable"
investors who wish to invest in bond-like instruments to gain as much as possible spread above
!
the risk-free rate, to offset at least partially the declining risk-free rate. Twenty years ago a pension
! align = "center|4"||2008
fund or insurance company selling annuities could invest at 3.5% real yield to maturity on an
! +align = "center|4"|2009
entirely risk-free basis; now it would be only 1.5%. So any products which appear to add 10, 20
|-
or 30 basis points to that yield, without adding too much risk, have looked very attractive.
!
Financial market innovation
!Q1 08
The demand for yield uplift, stimulated by macro-imbalances, has been met by a wave of financial
!Q2 08
innovation, focused on the origination, packaging, trading and distribution of securitised credit
!Q3 08
instruments. Simple forms of securitised credit – corporate bonds – have existed for almost as long
!Q4 08
as modern banking. In the US, securitised credit has played a major role in mortgage lending since
!Q1 09
the creation of Fannie Mae in the 1930s and had been playing a steadily increasing role in the
!Q2 09
global financial system and in particular in the American financial system for a decade and a half
!Q3 09
before the mid-1990s. But from the mid-1990s the system entered explosive growth in both scale
!Q4 09
and complexity:
|-
• with huge growth in the value of the total stock of credit securities (Exhibit 1.5);
!Exports
• an explosion in the complexity of the securities sold, with the growth of the alphabet soup of
| 5.2
structured credit products; and
| 5.4
• with the related explosion of the volume of credit derivatives, enabling investors and traders to
| -2.7
hedge underlying credit exposures, or to create synthetic credit exposures (Exhibit 1.6).
| -18.1
This financial innovation sought to satisfy the demand for yield uplift. It was predicated on the belief
| -13.4
that by slicing, structuring and hedging, it was possible to ‘create value’, offering investors combinations
| 1.8
of risk, return, and liquidity which were more attractive than those available from the direct
| 7.8
purchase of the underlying credit exposures. It resulted not only in massive growth in the importance
|
of securitised credit, but also in a profound change in the nature of the securitised credit model
|-
!Imports
|5.7
|4.8
| -2.8
| -18.2
| -14.7
| -0.8
| 8.7
|
|}

Revision as of 03:21, 25 March 2010

[1]


  1. ↑ The downturn in facts and figures, BBC News, 21 November 2007
4" 2008 4"|2009
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09
Exports 5.2 5.4 -2.7 -18.1 -13.4 1.8 7.8
Imports 5.7 4.8 -2.8 -18.2 -14.7 -0.8 8.7
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