Part A: Asset Valuations

Chart A.31 Advanced-economy risk-free real interest rates remain close to historically low levels International ten-year real government bond yields(a) Sources: Bloomberg and Bank calculations. Zero-coupon bond yields derived using inflation swap rates. UK real rates are defined relative to RPI inflation, whereas US and euro-area real rates are defined relative to CPI and HICP inflation respectively.

Chart A.32 Implied volatilities are low across a range of financial markets Dispersion in implied volatilities in foreign exchange, interest rate and equity markets(a) Sources: Barclays Live, BBA, Bloomberg, Chicago Mercantile Exchange, NYSE ICE and Bank calculations. Three-month implied volatilities for exchange rates, equities and ten-year interest rates.

Chart A.33 Spreads on high-yield corporate bonds are compressed relative to past averages High-yield corporate bond spreads(a) Sources: Bank of America Merrill Lynch Global Research and Bank calculations. Option-adjusted spreads. The US dollar series refers to US dollar-denominated bonds issued in the US domestic market, while the sterling and euro series refer to bonds issued in domestic or eurobond markets in the respective currencies.

Chart A.34 The causes of changes in nominal government bond yields differ across economies Changes in nominal ten-year interest rates since the November Report(a)(b) Sources: Bloomberg and Bank calculations. Zero-coupon rates derived from government bonds. The contribution of real rates and implied inflation to the change in nominal rates is calculated using inflation swaps, which reference RPI for the United Kingdom, CPI for the United States and HICP for the euro area. Shows changes in interest rates between 18 November 2016 and 16 June 2017.

Chart A.35 UK commercial real estate prices look stretched based on ranges of sustainable valuations Commercial real estate prices in the United Kingdom and ranges of sustainable valuations Sources: Bloomberg, Investment Property Forum, MSCI Inc. and Bank calculations. Sustainable valuations are estimated using an investment valuation approach and are based on an assumption that property is held for five years. The sustainable value of a property is the sum of discounted rental and sale proceeds. The rental proceeds are discounted using a 5-year gilt yield plus a risk premium, and the sale proceeds are discounted using a 20-year, 5-year forward gilt yield plus a risk premium. Expected rental value at the time of sale is based on Investment Property Forum Consensus forecasts. The range of sustainable valuations represents varying assumptions about the rental yield at the time of sale: either rental yields remain at their current levels (at the upper end), or rental yields revert to their 15-year historical average (at the lower end). For more details, see Crosby, N and Hughes, C (2011), ‘The basis of valuations for secured commercial property lending in the UK’, Journal of European Real Estate Research, Vol. 4, No. 3, pages 225–42.

Chart A.36 Interest rate risk related to corporate bond markets has increased Estimated losses in global corporate bond markets following a 100 basis point increase in interest rates(a) Sources: Barclays Live, Thomson Reuters Datastream and Bank calculations. The chart is a measure of how aggregate risk exposures to corporate bond markets globally have risen over time. It is calculated based on the Barclays Global Aggregate Corporate Bond Index, which can be used as a representative measure of global investment-grade corporate bond markets. However, the index does not capture all investment-grade corporate bonds. The measure has been inflation-adjusted, with prices indexed to January 2017.

Chart A.37 UK banks’ stock of CRE lending has more than halved since the crisis UK CRE debt reported to De Montfort University survey(a) Sources: De Montfort University and Bank calculations. The composition of the survey sample was altered as follows: a category for insurance companies was created in 2007, and another one for non-bank lenders in 2012. The category of insurance companies includes only UK insurers from 2007 to 2011, and all insurers from 2012 onwards. Data exclude commercial mortgage-backed securities.