Probably the most interesting piece is "Box G: “Low-For-Long” Interest Rates and Implications for Financial Stability"
...
" A longerterm risk is how the market participants’ exposures to greater levels of duration risk affect financial stability when rates eventually increase. The 2013 Taper Tantrum is an example of this potential dynamic, although the wider financial stability implications of that episode were limited. The potential risk here is that unexpected increases in rates negatively affect the balance sheets of financial institutions in such a way that leads to financial instability. Banks without adequate capital buffers could face solvency issues, while pension funds and insurance companies could
experience liquidity problems related to losses on
derivatives positions or increases in early liquidations.
Additionally, with valuations in both equity and credit
markets relatively high by historical standards and
likely to become further stretched in a low-for-long
environment, the risk of a sharp correction becomes
more likely, especially in conjunction with high levels of
leverage or excessive reliance on short-term wholesale
funding. Even small changes to expectations of far-in-the-future cash flow may have a disproportionate effect on current valuations when interest rates are low. As a result, such rate changes can lead to sharp adjustments in valuations. The potential negative effects that an unexpected increase in rates would have across
a variety of market participants make this longer-term
risk worth monitoring. Adequate guidance on the timing
and pace of any such policy-related increase will likely
reduce this risk."
The 2013 Taper Tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program. See https://www.reuters.com/article/us-usa-fed-2013-timeline/key...
In other words, everyone -- from the world's largest megabank to your Aunt Tillie's modest retirement plan -- is long low rates, so no one can afford to the see them rise much, let alone see them rise quickly and unexpectedly.
"The U.S. economy was in the midst of the longest
post-war economic expansion, with historically low
levels of unemployment, prior to the onset of the
COVID-19 pandemic earlier this year. The global
pandemic not only brought about a public health
crisis but also caused a contraction of economic
activity at an unprecedented pace. Initially, the
pandemic reduced consumer spending, slowed
manufacturing production, and led to widespread
business closures. The unemployment rate surged
from 3.5 percent in February to a record high of
nearly 15 percent in April. Since then, extraordinary
measures undertaken by policymakers have
succeeded in arresting the decline in economic
conditions, initiating a recovery and lowering the
unemployment rate to 7.9 percent as of September.
However, a protracted virus outbreak poses
downside risks that can slow the recovery and even
prolong the economic downturn."
...
"With cash flows impaired due to the COVID-19
pandemic, many businesses may be challenged to
service their debt. Since March, nearly $2 trillion in
nonfinancial corporate debt has been downgraded,
and default rates on leveraged loans and corporate
bonds have increased considerably. The growing
number of bankruptcy filings could stress resources
at courts and make it harder for firms to obtain
critical debtor-in-possession financing. It could also
prevent many firms from restructuring their debt
in a timely fashion, potentially forcing them into
liquidation."
...
"Money market funds (MMFs) offer shareholders
redemptions on a daily basis while holding many
short-term assets that are less liquid, especially in
times of stress. Stresses on prime and tax-exempt
money funds in March revealed continued structural
vulnerabilities, which led to increased redemptions
and, in turn, likely contributed to the stress in
STFMs. Among institutional and retail prime MMFs,
outflows as a percentage of fund assets exceeded
that of the September 2008 crisis. Outflows abated
after the Federal Reserve announced support for the
CP market and MMFs."
The 2013 Taper Tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program. See https://www.reuters.com/article/us-usa-fed-2013-timeline/key...