“The ECB cannot and should not turn a blind eye to risks to financial stability.”

“Maintaining financial stability is about two things: First, it is about preventing the build-up of bubbles; second, it is about making the system more resilient,” said ECB Executive Board Member and Vice-Chair of the ECB’s Supervisory Board, Sabine Lautenschläger, today in a speech. It’s not often that central bankers are allowed to use the B-word in public, except when denying that bubbles exist, or when denying that they can be identified if they do exist.

“Prices of several asset classes are influenced by the central bank’s policies,” she said. And these policies of the ECB include:

* A negative interest rate policy (NIRP), with the ECB’s deposit rate a negative -0.4%;
* An asset purchase program (QE) where the ECB buys government bonds, corporate bonds, asset backed securities, and covered bonds.

These policies have driven yields of many government bonds and some corporate bonds into the negative. The ECB’s balance sheet has swollen with assets. Borrowing for some countries and companies has become essentially free. Asset prices have surged, including the prices of homes, stocks, bonds, commercial real estate, etc.

Even at the riskiest end, junk bond yields dropped to a ludicrously low 2.1% by October 30 last year (ICE BofAML Euro High Yield Index Effective Yield), though they have lost some steam since (when bond yields fall, bond prices rise). These policies have triggered the most dizzyingly absurd corporate bond bubble ever.

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