The risk-free yield curve also has fundamental implications for financial stability. It defines the terms of maturity transformation in an economy. Partly because of regulation, the “safe” assets that banks and institutional investors hold on their balance sheets are largely government bonds. The yield on government bonds will influence other risk exposures taken by the financial industry. And it is long-term rates – not short-term rates – that help determine the prices of long-term assets. In short, the high level of government debt in major countries will have implications for monetary policy, debt management policy and financial stability policies
