High stock valuations could pose potential dangers, per Chair of the Board of Governors of the Federal Reserve System, Janet Yellen on Wednesday. She added that stability risks across the U.S. financial system remain in check amidst the run up stock prices.
Fed Chief Yellen said, "I would highlight that equity market valuations at this point generally are quite high. There are potential dangers there."
The answer from Yellen, was in response to a question from Christine Lagarde, Managing Director for the International Monetary Fund (IMF), who joined her for the opening session of the "Finance and Society" conference.
Yellen said, "We’ve also seen the compression of spreads on high-yield debt, which certainly looks like a reach for yield type of behavior."
Following Yellen's comments, U.S. stocks moved sharply lower following the initial downtrend across the board, triggered by weak private job data.
Yellen pointed out that, another trouble spot for the financial markets is low long-term interest rates which could spike as the Fed normalizes its policy, potentially causing a major disruption across the financial system.
Yellen said, “When the Fed decides it’s time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates. So we’re trying to communicate as clearly about our monetary policy so we don’t take markets by surprise.”
With longer-maturity Treasuries declining the most after Yellen's comments, U.S. Treasuries continued to slide for a ninth straight day on Wednesday amid a global bond sell-off.
Contributed by Millennium Traders
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