BIS warns of mounting disconnect between debt and stock markets

Group 1 - The Bank for International Settlements (BIS) has indicated that record global share prices are increasingly disconnected from rising concerns about government debt levels in bond markets [1][2] - Moody's has downgraded the United States to a non-triple A status, and Fitch has cut France's rating to its lowest ever level due to concerns about government finances [2] - The head of BIS' Monetary and Economic Department, Hyun Song Shin, warned about the elevated valuations of risky assets, which leave them vulnerable to market stress [2][3] Group 2 - Government bond issuance is being absorbed by highly-leveraged investors like hedge funds, which could lead to market eruptions before debt levels exceed sustainability definitions [3] - Despite some non-U.S. investors selling U.S. bonds and stocks in April, most of these flows reversed in May and June, indicating a gradual shift away from U.S. assets [4] - The BIS noted that the significant holdings of U.S. assets by global investors and the slow pace of strategic asset allocation suggest any major portfolio shifts will be gradual [4] Group 3 - A new global survey by the BIS on public inflation expectations shows that the post-COVID spike in prices has raised household inflation expectations, particularly in countries with the largest increases [5][6] - The BIS expressed concerns about the lasting effects of temporary inflation surges, noting that households generally do not blame central banks for inflation issues [6] - There is a cooling of the real economy, particularly in the U.S. labor market, as indicated by Shin [6]