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jonpo

Inverted Yield Curve Recession And Pre Buget Speech.

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I was checking out the Yeild curves on bloomberg just bofore the Non Farm payroll figure on friday and noticed the current lovely inverted yield curve of UK interest rates. for those that don't know the rare Inverted curve Is one of the best known predictive indicators of an economic recession.

first take a look at the curve here:

http://www.bloomberg.com/markets/rates/uk.html

Then if you have a spare few hours take a look at this excellent PHD paper I found on yeild curves and economic cycles.

http://www.mises.org/etexts/cwik-dissertation.pdf

the problem is that this means the market is predicting that short interest rates will fall. the problem is that this would only stoke the fires of our current bout of inflation. which will happen? a plain old recession or further house price inflation on the back of decreasing short rates.

still what ever happens it seems that a recession is certainly on the cards in 2006. so it is will be interesting to see how gordo will attempt to paper over the black hole he is creating by spending insane ammounts on jobs in the public sector and then letting them retire at 60 and buy half price homes in new providence wharf http://www.findaproperty.co.uk/area.aspx?a...salerent=0&sp=0, will he attempt to make the oil companies pay for those nice houses and generous pension benefits ? it would be folly surely.

2006 a bumper year for the printing of (gilts) money by the government it looks. lets just hope we cann all get our assets out of UK plc and into a more thrifty hard working society not besed on selling houses to each other.

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I was checking out the Yeild curves on bloomberg just bofore the Non Farm payroll figure on friday and noticed the current lovely inverted yield curve of UK interest rates. for those that don't know the rare Inverted curve Is one of the best known predictive indicators of an economic recession.

first take a look at the curve here:

http://www.bloomberg.com/markets/rates/uk.html

Then if you have a spare few hours take a look at this excellent PHD paper I found on yeild curves and economic cycles.

http://www.mises.org/etexts/cwik-dissertation.pdf

the problem is that this means the market is predicting that short interest rates will fall. the problem is that this would only stoke the fires of our current bout of inflation. which will happen? a plain old recession or further house price inflation on the back of decreasing short rates.

still what ever happens it seems that a recession is certainly on the cards in 2006. so it is will be interesting to see how gordo will attempt to paper over the black hole he is creating by spending insane ammounts on jobs in the public sector and then letting them retire at 60 and buy half price homes in new providence wharf http://www.findaproperty.co.uk/area.aspx?a...salerent=0&sp=0, will he attempt to make the oil companies pay for those nice houses and generous pension benefits ? it would be folly surely.

2006 a bumper year for the printing of (gilts) money by the government it looks. lets just hope we cann all get our assets out of UK plc and into a more thrifty hard working society not besed on selling houses to each other.

It has been mentioned/cropped up a few times in the past..

http://www.housepricecrash.co.uk/forum/ind...ted+yield+curve

still its worthy of mentioning many times and its good to see that fresh eyes can see it :)

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I would be really grateful if someone could explain what an inverted yield curve is. I am still clueless about this, other than it is something to do with government bonds? :huh:

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I would be really grateful if someone could explain what an inverted yield curve is. I am still clueless about this, other than it is something to do with government bonds? :huh:

Normally you get a higher interest rate if you agree to tie up your money for a longer period of time time. So the rate of return on a ten year bond is higher than the rate on a bond that lasts for one year.

When the yield curve is inverted it is the other way round. Short term bonds earn more per year than long term bonds.

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Normally you get a higher interest rate if you agree to tie up your money for a longer period of time time. So the rate of return on a ten year bond is higher than the rate on a bond that lasts for one year.

When the yield curve is inverted it is the other way round. Short term bonds earn more per year than long term bonds.

Ahhh, that was very helpful, thanks.

So why does that suggest a recession?

Is it because they can get away with paying you less in the recession as yields on most assets would be low?

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I would be really grateful if someone could explain what an inverted yield curve is. I am still clueless about this, other than it is something to do with government bonds? :huh:

I'm not sure I am the best person to explain this but the inverted yeild curve comes about when interest rates which are fixed over a short about of time 1 year for instance rise above those demanded buy the market for fixed interest over long periods

i.e you want a loan of 1 million for 1 year lets say to buy a small flat in wapping and do it up. we can agree a rate of 4.43% for the entire year fixed. so at the end of a year I get back the 1 million and all the interest you owe me. now in that period interest rates might have gone up or down but the important thins is I have got the principal money back.

now take the same situation but now you want to borrow the money over a 30year time horizon you will have (in the case of an inverted yeild curve) an interest rate this time of only 4.1% every year you pay me a 4.1% cupon and at the end of 30 years I get the money back.

because you are paying more for the short money the short money is more expensive and hence the curve is inverted. because the normal situation is that the curve slopes upward.

for a probably much better textbook interpretation see wikipedia. http://en.wikipedia.org/wiki/Yield_curve

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An inverted curve can signal an economic slowdown , though the curve has inverted before each of the last four recessions a curve inversion hasn't always led to a recession.

Some of the latest decline in longer-term yields is perhaps due to strong foreign buying of U.S. debt and the U.S's shift to issuing more short-term debt than long-term debt?

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There is one very important aspect of an inverted yield curve and that is the ability of governements and banks alike to spike the punch bowl and allow an inflationary binge to occur on the back of cheap short-term money on the back of the cary trade. This is what we have seen over the last few years, the govt creates money out of thin air at low short term rates and the banks borrow it and lend it on long term - no gueses where most of this money has gone. It becomes unprofitable or less so when short term rates are near or even above long term rates.

Through this process £100bn's has swamped the UK economy alone and provided economic curn, the bulk of the economists have recongnised this as "growth", of course it is nothing of the sort in real terms.

Edited by OnlyMe

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It becomes unprofitable or less so when short term rates are near or even above long term rates.

So does this explain why the banks are starting to get tougher on valuations, because they are less keen on long term loans? Less profit!

(Apart from the rapidly rising repo and bankruptcy rates, of course.)

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Thanks All,

Very helpful post on Yield Curves.

Looks like the markets think we are heading into recession.

Just a note: The inverted yield curve as a predictor of recession holds best for the US economy.

The UK has historically been more prone to an inverted yield curve because of the high demand for long-dated securities by private pension funds and insurers.

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FTBAgain,

So does this explain why the banks are starting to get tougher on valuations, because they are less keen

on long term loans? Less profit!

Well look at it this way - if they are making a fortune on loans then they can let the defaults ride, if they are making less on the loans then the defaults will hurt more, so yes to a certain extent the shape of the yield curve can affect the overall profitability of overlending.

Much the same can be seen from the CC market with 0% offers being canned, again it costs more to source the money, overall lending reduces, overall profit reduces and the effect of losses is proportionately higher.

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FTBAgain,

So does this explain why the banks are starting to get tougher on valuations, because they are less keen

on long term loans? Less profit!

Well look at it this way - if they are making a fortune on loans then they can let the defaults ride, if they are making less on the loans then the defaults will hurt more, so yes to a certain extent the shape of the yield curve can affect the overall profitability of overlending.

Much the same can be seen from the CC market with 0% offers being canned, again it costs more to source the money, overall lending reduces, overall profit reduces and the effect of losses is proportionately higher.

OnlyMe,

Thanks, I figured it must be something like that. If the inversion holds for an extended period of time we could see the supply of money to the Housing Market dry up, chocking of the demand.

This is getting more and more interesting. Some of the points raised in this thread seem to tie in nicely with Marko's thread about the moneylenders video (which I will down load later)!

http://www.housepricecrash.co.uk/forum/ind...showtopic=19923

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Ahhh, that was very helpful, thanks.

So why does that suggest a recession?

Is it because they can get away with paying you less in the recession as yields on most assets would be low?

It means people aren't very confident in the short term so they pile into longterm treasuries like the 30 year bond, thus driving yields down, look at the volumes.

Also, it sets marker expectatons of inflation and IR over the short term for those bonds with short maturities, in this territory you're very much in a dalliance with the central bank.

P.S. Don't fight the FED!

Edited by BuyingBear

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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