OPINION: An inverted yield curve is met with dread, so it’s probably worth an explanation to those not well versed in the ways of the bond market.
On Wednesday, the bond market watched with peril as the yield on the US 10-year Treasury bond briefly dipped below that of the two-year benchmark bond. ThisOne observer noted the sky should have turned dark and the oceans bubble, because anAn inverted yield curve is a tell-tale sign that a recession looms. That such a seemingly obscure and technical market price can incite dread is probably worth an explanation.
For instance, I may expect a 1 per cent yield for a one-year bond, but for five years I may demand say 1.5 per cent, and for 10 years perhaps 2.5 per cent.The curve plots the expected path of prevailing interest rates, and additional yield compensates for risk and uncertainty. The longer the period, the more the risk, and therefore the more compensation.That yield curve is set by the market which is weighing a lot of information to effectively bet what central banks do with policy rates.
So, there is a lot of information in that yield curve that captures the collective wisdom of traders and investors as to where the economy, and by extension, the market is headed.Since the evidence of inflation is overwhelming and central banks, in particular the US Federal Reserve, are preparing to crank up interest rate settings, bond yields are rising sharply. The US two-year yield has shot higher from 0.5 per cent in November to 2.3 per cent, while the five-year rate has risen from 1.
What this is signalling is that the Fed will raise interest rates quite aggressively but at some point will stop and then begin to cut rates. Why would it cut rates? Because inflation may be subdued and the economy weakens. This is why yield curve inversion is seen as a bad sign.But yield curves do have predictive powers.
South Africa Latest News, South Africa Headlines
Similar News:You can also read news stories similar to this one that we have collected from other news sources.
Why is Abramovich playing peacemaker after Russia’s invasion of Ukraine?the presence of previously publicity-shy billionaire at talks in Istanbul has surprised many
Read more »
Why no show, book, podcast or film can get Elizabeth Holmes quite rightOf all the celebrity fraudsters around right now, the Theranos founder might be the hardest one to get a handle on.
Read more »
Why Frydenberg’s budget is such an economic failureA bigger cash splash than Kevin Rudd’s first stimulus and a bloated project pipeline just rankle when the medium-term challenges are so real.
Read more »
Larrimah, population 11, could become the next boom town, so why are locals on the fence?An oil and gas company planning to expand the NT's on-shore shale gas industry could bring an influx of workers to the tiny highway town, where locals fear for their quality of life, water, and Indigenous sacred sites.
Read more »
Why there’s something fishy about Dolphins’ attempts to lure big namesAbide by the rules? Wayne Bennett is a fine one to talk, say rivals, when someone at his new club has been flouting the NRL’s November 1 edict.
Read more »
Why our ‘fried egg’ city has been scrambled - and what it means for propertyCOVID-19 took a spatula to the dynamics of a city - and the big winners were regional centres two hours from our CBDs. covid19 citylife
Read more »