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Inverted Yield Curve

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Would some one please explain what an inverted yield curve is? I see it mentioned alot in the main forum, and it seems to be something quite important but I still can't figure out what exactly it is..

What "yield" is being measured?

Where do the figures come from?

Does it affect only the USA or is it a global trend?

And how could it affect a HPC?

Many thanks,

E773

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Would some one please explain what an inverted yield curve is? I see it mentioned alot in the main forum, and it seems to be something quite important but I still can't figure out what exactly it is..

What "yield" is being measured?

Where do the figures come from?

Does it affect only the USA or is it a global trend?

And how could it affect a HPC?

Many thanks,

E773

Example:

If I was to put my money into a bank account today I could get 4.5% interest (the yield) on a variable rate, or if I fixed it for a year I would get 5%. For tying your money up for a year you would expect a higher return for your troubles as you can't touch the money for 1 year.

If there was an inverted yield curve, you could get, for example, 4.5% variable now, or 4% fixed for a year. The only reason you would accept a lower fixed rate is if you expect interest rates to fall below the variable rate (the point it goes negative).

Interest rates usually fall because of lower growth, and hence a recession - which isn't a good thing for the housing market as unemployment usually goes up.

The yield curve is different in most countries. In the UK it is generally flat with [slightly] higher interest rates currently being predicted. But this changes all the time.

That's my understanding of it...

You can read more here: http://en.wikipedia.org/wiki/Yield_curve

Edited by Jason

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Its simple.

People normally get greater yield the longer they tie up thier capital.

A instant savings account might pay 5%, but a 10 year bond will pay 5.6%.

A postive or upward sloping yield curve is the normal state of an expanding economy which is making real income and has real growth. Banks like to give savers 5%, and invest their savings at 5.6% keeping the difference as profit. Businesses (like BTLs) will borrow at this fixed rate of 5.6% for 10 years, while they have greater cashflows of 6% say.

A negative curve occurs when the demand for these longer term loans grows, and therefore the price rises and the yield drops. It is a sign that businesses are seeing much greater cashflows due to rising money inflation and they demand more loans.

The short term rate rises in response to this inflation. The banking system stops making this spread.

The reason why they tend to predict recession is that the rising short term rates have to act in a meaningful way to remove this money inflation from the economy and put pressure on business cashflows as the central bank moves from an accomodating stance to a inflation fighting stance.

As economies are linked by information and trade, the economies with a common language and greater trade dependacies are locked into the same economic cycle with similar economic policies and interest rates. This is because nearly all real economic growth comes from technological (productivity) breakthroughs, and the advantage of speaking the same language etc.. gives these economies similar productivity and growth rates, inflation etc... tendancies. So the yield curve in a massive economy like the US will affect demand for loans not just in the US, but in its satellite economies.

Edited by brainclamp

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  • 333 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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