World risks fresh credit bubble, Switzerland’s BIS warns

"Some asset prices appeared highly valued in a historical context relative to indicators of their riskiness,” said the bank in its quarterly report.

Yields on morgtage bonds have fallen to the lowest level ever recorded. Spreads on corporate debt have narrowed to the wafer thin margins of 2007, even though default rates are currently three times higher than they were then for junk bonds and twice as high for investment-grade companies.

The venerable Swiss-based institution – almost alone in warning of a global debt crisis in the build-up to the Great Recession – said it is rare for markets to gather steam at a time when the major forecasters are turning gloomy.

The International Monetary Fund and the OECD have downgraded their outlooks for 2012 and 2013, with sharp cuts for much of Europe as well as for Brazil, China, and India.

“Unusually, equity and fixed income gains coincided with a weakening of the global economic outlook. In the past, falling growth forecasts have usually been associated with rising expected default rates and higher bond yields,” it said.

The anomaly is doubly strange given the spate of profit warnings by companies on both sides of the Atlantic. The BIS said earnings expectations on Wall Street have dropped “particularly sharply” with an “unusually high proportion” of companies downgrading forecasts, yet equity prices have risen..."

at http://stratrisks.com/geostrat/9795