The Reserve Bank of Australia's assistant governor is warning global financial markets are likely headed for a violent sell-off.
In words reminiscent of former Federal Reserve chair Alan Greenspan's famous "irrational exuberance" comments, Guy Debelle told a conference in Sydney yesterday that fixed-interest markets in particular could be sold sharply when interest rates begin rising again.
Dr Debelle said history shows when investors start selling, the exits tend to get jammed.
The RBA official charged with monitoring financial markets said traders appear to be underpricing risks around Middle East and Eastern European tensions, potential changes in US interest rates, policy uncertainty in Europe and Japan and rising concerns about China's economic health, the ABC reports.
Dr Debelle said the contrast between relatively low volatility on markets and relatively high uncertainty in real world events is "unlikely to be resolved smoothly."
"There are a few other reasons to suspect that the sell-off, particularly in fixed income, could be relatively violent when it comes," he warned investors.
Dr Debelle said many investors seem to be assuming that there will be buyers for their investments when markets finally turn, and that they will be able to get out ahead of a major sell-off.
"History tells us that this is generally not a successful strategy. The exits tend to get jammed unexpectedly and rapidly," he cautioned.
Dr Debelle also sees zero, or near zero, interest rates in many major economies as another factor that could spark a violent market correction.
Milford Asset Management's trans-Tasman bond fund portfolio manager, David Lewis, says Australia's central bank has made similar comments over the last few months but has now stepped up the rhetoric.