Wednesday, February 20, 2008

Central Banks show caution

Source: Central Banks take fewer risks

In light of the global credit squeeze, surveys indicate that managers of foreign exchange reserves within central banks are considerably more risk-averse, placing safe assets back in favor. Investment managers report that pressure is on them to search for greater yields, but that the risk required to achiever higher returns is not favored. Additionally, managers report feeling a much greater pressure to increase the transparency of their investment strategies.

In comparison to last year, more than 80% of reserve managers said that junk bonds, asset-backed securities and mortgage-backed securities are less attractive. In contrast, highly rated government securities are much more attractive. Reports one reserve manager from Asia, “Demand for mortgage-related and other structured products will slow down for some time until financial institutions hit by exposures from subprime investments have recapitalized their balance sheets, ensured their viability and restored confidence of investors in the financial markets.”

However, in spite of shying away from higher-risk assets, at least half of reserve managers report they think there will be a continued emphasis on increasing yields of funds under management. Additionally, euro-dominated assets continue to gain favor, with as many as two-thirds of responding reserve managers reporting that they had increased the proportion of their respective central bank’s euro-backed assets.

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