As govt bond yields dry up, central banks ramp up their risk taking

Central banks have earmarked an average of about 14 per cent of their assets for non-traditional investments, a survey showed

Central banks are ramping up their risk taking.

The days of plain old bonds and gold are over as central banks bet some of their trillions of dollars of foreign reserves on mortgage-backed securities, corporate debt, equities and emerging-market debt.

“Central bank reserve managers typically wake up in the morning figuring out how to avoid losing money,” said Alex Millar, head of EMEA sovereign and institutional sales at Invesco Ltd. But now, "the requirement for return is creeping up.”

Government-backed agencies have traditionally focused on preserving capital. However, with some government-bond yields having slumped below zero, generating a return has become a bigger priority, according to a survey of 62 central banks carried out by Invesco.

Central banks have earmarked an average of about 14 per cent of their assets for non-traditional investments, the survey showed. They have increased their allocation to mortgage-backed securities sponsored by US agencies to more than 5 percent of their assets under management from just 0.7 per cent in the past two years.

“They’ve had to look for asset classes outside of their traditional comfort zone,” Millar said. “They’re beefing up their risk-management capabilities, their understanding of asset classes, having to educate their board on why they need to do that.”

Central banks are also refocusing their reserves away from euros in favor of dollars and other currencies. Holding foreign currencies isn’t risk-free because it exposes central banks to depreciation risk and volatility.