Bonds: Fight against climate change might entail financial stability risks, BoE staff muse

These were the movements in some of the most widley-followed 10-year sovereign bond yields:

US: 2.40% (-6bp)

UK: 1.37% (-6bp)
Germany: 0.36% (-6bp)
France: 0.86% (-5bp)
Italy: 1.99% (-3bp)
Spain: 1.44% (-7bp)
Portugal: 3.79% (-8bp)
Greece: 6.99% (-9bp)
Japan: 0.06% (-1bp)

Sovereign bond yields found a strong bid on Monday after the new US president signed an executive order yanking his country out of the Trans Pacific Partnership and announced he would levy "a very major" border tax on companies choosing to move overseas.

Just as significant, while Donald Trump also reportedly told a group of executives from America´s leading companies that he would push for a big reduction in regulation and corporate taxes, for now at least the emphasis was on trade protectionism.

Nevertheless, at least for European corporates, in many cases the combination of higher taxes on imports and lower corporate taxes might yey be positive, JP Morgan strategist Mislav Matejka said in a research note sent to clients.

The stronger dollar which would result from the trade tax, Matejka added, would also act as a certain offset for foreign corporates, by boosting the value of their US earnings.

"US and international law provides mechanisms to respond to alleged trade abuses and the US has been an active user of such tools as anti-dumping duties. It is appropriate to respond in cases of abuse of trade agreements. But care needs to be taken to avoid costly protectionism, which reduces efficiency and hurts growth," chipped in analysts at HSBC.

Of interest, in a blog post three Bank of England staff penned an article cautioning of the potential for risks to financial stability arising from the transition to a more a clean-energy economy.

"According to one estimate, 80% of energy firms’ equity valuations depend on cash flows further than 5 years in the future. So, even if the energy transition kicks in only by 2020, it could have a large impact on today’s valuations.

"Large movements in prices may not, in themselves, impair financial stability. But risks might arise if a sharp repricing was to occur in several sectors simultaneously (say, oil & gas, utilities, automobiles, materials) or if this were to spark further sales by investors and affected the availability of finance for firms more broadly," Yuliya Baranova, Joseph Noss and Carsten Jung said in their post.