Jump to content
House Price Crash Forum
Sign in to follow this  
libitina

Flattened Yield Curve

Recommended Posts

Um.. good question. Taken from: http://en.wikipedia.org/wiki/Yield_curve

(Remember when reading the following, to always bear in mind risk vs reward. If you are leaving your money tied up somewhere for longer, there is greater risk, hence you usually demand a greater reward).

"The yield of a debt instrument is the amount of money received per year by investing in that instrument.

[in our case, the risk-free rate of return of govt bonds].

...

Yield curves are usually upward sloping and accelerating; the longer the maturity, the higher the yield. The usual explanation is that longer maturities entail greater risks for the investor (i.e. the lender) and so require higher yields.

[Just take this as a given..Basically, leaving your money somewhere for longer, you would demand a greater return]

...

Normal Yield Curve

The yield curve gently slopes upward when bond investors expect the economy to grow smoothly without significant shocks. Under these conditions, investors who risk their cash for longer periods expect higher returns than those who risk their money for shorter periods. Therefore, interest rates move progressively higher as maturities lengthen, producing a positive sloping curve.

Steep Yield Curve

Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises relatively higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (right after the end of a recession). Here, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity.

Flat or Humped Yield Curve

A flat curve is apparent when all maturities have same yields, whereas a humped curve results when short-term and long-term yields are equal and mid-term yields vary from those of the short-term and long-term. A flat curve sends signals of uncertainty in the economy. This mixed signal can revert back to a normal curve or could later result into an inverted curve.

Inverted Yield Curve

An inverted curve occurs when long-term yields fall below short-term yields. Under this abnormal and contradictory situation, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve may indicate a worsening economic situation in the future. However, technical factors such as a flight-to-quality or global economic or currency situations may cause demand for bonds on the long end of the yield curve causing rates to fall.

---

Hope I have not copied too much from the source material!

Edited by Van

Share this post


Link to post
Share on other sites

Bump.

A good article and I would like someone else to post their thoughts on it.

I think it means that long term interest rates are way below short term interest rates. This has shown in the past that investors are prepared to snuggle their money away for what appear to be small returns - happens when people think there will be a recession.

However, moron Greenspan thinks it is nothing to worry about and is due to the Far East saving, which is partially debunked in the link. (I think)

They are saying that long term interest rates could shoot up - bad for house market. However, Mervyn was talking about the same thing last week, so maybe they know something we don't . . . .

Share this post


Link to post
Share on other sites

Is it just me, or does the article seem to stop a couple of paragraphs short of actually providing a conclusion? It doesn't sound good anyway!

I would suggest you read the following for a practical, plain, if lenghty, (american) english explanation of the inverted yield curve: http://www.frontlinethoughts.com/printarti...sp?id=mwo123005

Share this post


Link to post
Share on other sites

Blimey, that is a great piece.

Basically: watch this space. Soros seems to be buying the story, or course. Yield curve is not fully inverted yet, but it has sort of flatteded. And probability of recession is still low at this stage, but the signs are that this probability will creep up.

Share this post


Link to post
Share on other sites

Others here have previously posted that while previous recessions have been preceded by an inverted yield curve not all examples of this have seen a following recession.

So I think the considered opinion is that this phenomenon, whilst of note, is not exactly a certain indicator.

That's economics for you!

Share this post


Link to post
Share on other sites

As far as I can gather, the greater the demand for gilts (ie long term government issued bonds) the higher the price and consequently the lower the yield. In the UK's case one reason for high demand is that many large company pension funds are penalised unless they have a certain proportion of their assets in gilts. This was a Broon innovation which forced pensions to lend money to HMG. But this high demand has pushed yields down, thus putting the funds in the invidious position of having to invest more in an asset which is returning less and less as demand goes up, making the pension fund deficit problems worse. The companies have apparently been pressing the Treasury to issue extra bonds so that they can buy up their quotas and get higher yields.

Why the US has an inverted yield curve I don't know, and I'd be the last person to claim I understood any of this fully, if at all.

BA

PS Libitina please may we have a return to the days of your racy avatars?

Share this post


Link to post
Share on other sites

http://www.thebusinessonline.com/Stories.a...E6-776C6515F648

"the regulatory authorities in the UK require that pension funds match their liabilities with assets of similar maturity and there has been a heavy period of buying recently as funds undergo a process of rebalancing. But it gets worse: falling bond yields also reduce the discount factor used by funds to calculate the discounted value of their liabilities, thus swelling the book value of liabilities and making the pensions black hole even darker. Thus, by obeying the regulations and attempting to match both sides of the balance sheet, pension funds find themselves in a worse situation than before, requiring them to buy ever greater amounts of long-dated paper. And the lower yields go, the worse pension fund returns will be, which hammers returns. Catch-22 has nothing on this."

"The long and the short of it is that whilst the asset and liability matching rules are sensible in theory, they are unworkable in practice. Unless pension funds are allowed to relax the rules a little, it seems likely that this problem is set to persist – to the detriment of a future generation of pensioners "

Share this post


Link to post
Share on other sites

I had understood that if the yield curve inverts (esp on the US side) the various carry trades are no longer viable which causes a pull back from the long US bond market and sends long term yields and interest rates up (gradually sending short term rates up too).

Is this right? If so, where will all the billions (trillions?) of dollars in carry trades go if this happens?

Share this post


Link to post
Share on other sites

That is my understanding too, Tempest. I would welcome comment from someone who has a better understanding than me.

If UK pensions are required to invest in bonds which are becoming ever less valuable, when SIPPS comes in, surely most people will convert to a self-administered pension fund, and dispose of the bonds as soon as possible. My understanding of UK pension legislation may not be perfect, and this may not be possible. But I do know that my own pension fund is not controlled by pension trustees in so far as fund selection goes.

If people can make that conversion, surely they will dump the bonds, which will ultimately put the prices back up.

Comments please? ;)

Share this post


Link to post
Share on other sites

That is my understanding too, Tempest. I would welcome comment from someone who has a better understanding than me.

If UK pensions are required to invest in bonds which are becoming ever less valuable, when SIPPS comes in, surely most people will convert to a self-administered pension fund, and dispose of the bonds as soon as possible. My understanding of UK pension legislation may not be perfect, and this may not be possible. But I do know that my own pension fund is not controlled by pension trustees in so far as fund selection goes.

If people can make that conversion, surely they will dump the bonds, which will ultimately put the prices back up.

Comments please? ;)

Surely they should sell the bonds now at a gain on face value and go into company funding, stick it right up browns #*! when he can't raise any cash!

Makes me glad I stopped my pension (and started isas) after the equitable life problems, no more good money after bad.

Share this post


Link to post
Share on other sites

That is my understanding too, Tempest. I would welcome comment from someone who has a better understanding than me.

If UK pensions are required to invest in bonds which are becoming ever less valuable, when SIPPS comes in, surely most people will convert to a self-administered pension fund, and dispose of the bonds as soon as possible. My understanding of UK pension legislation may not be perfect, and this may not be possible. But I do know that my own pension fund is not controlled by pension trustees in so far as fund selection goes.

If people can make that conversion, surely they will dump the bonds, which will ultimately put the prices back up.

Comments please? ;)

I'm not sure you can transfer all types of pension into a sipp but you certainly can transfer your own individual fund (though with penalties on transfers from such as Equitable Life!).

The word on the street is that these SIPP funds are only suitable for the well heeled as charges eat into smaller contributions but http://www.sippdeal.co.uk/charges.aspx are fairly reasonable in my view and if you run your SIPP sensibly ( and don't stuff it with penny AIM stocks for instance) you should certainly beat the so called professionals.

As for the number of SIPP holders dumping bonds and affecting the market I think that's unlikely as the number of SIPPs is minute compared to all other pensions. Let's face it most Brits would rather leave their financial matters to the pro's even thought they know they're been ripped off!

(3,000 City workers were due to get £1 million bonus's last year - just who's pocket did that money come out of?)

Edited by ILikeBigBoobs

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.