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Optobear

Yield Curve Now Almost Flat

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Looking at the BBC data

http://newsvote.bbc.co.uk/1/shared/fds/hi/...ilt/default.stm

The yield curve is very much flattened for the next decade, meaning that longer term yields have risen.

I can imagine two reasons for this, firstly, that people expect more inflation, so are demanding higher yields for buying the longer term gilts. However, given the yield curve has been strongly inverted (low rates for long terms), and it is now flatter, perhaps it indicates a sense that the impending "doom and gloom" is now upon us, and that we are in the middle of the market falls and inflation shocks. In which case, it might suggest brighter days ahead? Question is "how far ahead?".

Come on yield curve afficionadoes - share your views!

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It's hard to say. Lots of money moving into bond to avoid volatility in other markets. Flat yield curve usually means the boom is over.

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http://www.yieldcurve.com/marketyieldcurve.asp

growth fears outweighing inflation fears ?

Still not much room for cuts!

No, agreed, pretty much rules out any further cuts. Back to 1970s interest rates? 15% in 1976, to match the overall stagflation. Now that would hurt people on IO mortgages at 6 times salary.

http://www.bankofengland.co.uk/statistics/rates/baserate.pdf

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"Yield Curve Now Almost Flat, No longer inverted. What does it mean?"

I haven't got a bloody clue i'm afraid. How about an idiots guide?

I would boldly suggest that there 's a fair few people on here who are completely ignorant like me about stuff like this , so seriously, what DOES it mean, in layman's terms?

Thanks :unsure:

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"Yield Curve Now Almost Flat, No longer inverted. What does it mean?"

I haven't got a bloody clue i'm afraid. How about an idiots guide?

I would boldly suggest that there 's a fair few people on here who are completely ignorant like me about stuff like this , so seriously, what DOES it mean, in layman's terms?

Thanks :unsure:

For this one, it will be quicker just to read the Wiki article

Bonds yields are something I never found particularly intuitive.

Edited by mirage

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An inverted yield curve usually is a good predictor of recession, and when it uninverts, as the US YC already has, is usually when recession starts. Which is probably true if GDP was measured correctly.

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For this one, it will be quicker just to read the Wiki article

Bonds yields are something I never found particularly intuitive.

The wiki article is pretty involved.

My understanding is quite limited, but I think it comes down to:

The government borrow money, through issuing things called gilts. People (eg pension funds) buy them, and they pay back a certain amount on a set redemption date. These gilts get traded, and the price at the time is equivalent to a certain rate of interest until the maturity date. So if it pays back a guaranteed £1.05, in exactly one year, and currently cost £1.00, it is equivalent to a 5% interest rate. The BBC website obligingly calculates the yield for you from the prices. It also shows how it is changing.

Normally you might expect something like:

5%/pa return if you have to wait one year before the gilts gets turned back to cash,

5.25%/pa if you to wait two years

5.5%/ pa if you have to wait three years,

etc.

The reason rates are normally higher for longer maturities is that people want a premium for tying their money up for longer. Just the same as when you receive better interest on a 1 year notice account than on an instant access. The higher interest reflects the fact inflation will erode the real return, and also to compensate for uncertainty over inflation (and over prevailing interest rates on instant access products).

For the last year (or maybe longer - not sure how to find the data), the yield curve has been inverted, meaning that people might expect

5%/pa if held for 1 year

but only

4.5%/pa if held for 5 years.

That is unusual, as it suggests that people are anticipating falling interest rates and a faltering economy. However, an inverted yield curve doesn't always means a recession will happen, because, for example, changes in pension legislation have meant that insurance companies have wanted more of the longer dated gilts to match with pension payment liabilities. So the inverted yield curve is an indicator, rather than an absolute predictor of economic trouble ahead.

The change recently is that the yield curve has become flattened, ie in the example I give, people are expecting about 5%/pa regardless of how long until the maturity of the gilts (turning back into cash).

Gilts are presumed to be risk free because they are issued by government (unlike company bonds), and so there is no risk of default (you'll always get your money).

So gilts, and the future yields on gilts provide some guidance as to how the markets expect inflation and interest rates to vary over the coming years.

I was posting to see what people thought the recent flattening might indicate (that the worst is now upon us), or maybe even whether the markets might even think the worst is over?

Please correct me if I have mad errors here, I am no expert, but yield curve does seem to offer some good insight into market perceptions, and so is worth reviewing.

Needless to say, the yield curve also reflects the likely prices of fixed rate mortgages, and so is pretty directly tied to house price crashes or inflation.

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Bonds are optimistically overpriced. A 30 year bond has a yield of 4.50%. Its hard to see inflation not being above 4% within the next 30 years.

Probably because there is still so much money about.

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I think shorting bonds is one of the trades of the century...

Paul van Eeden has said something similar.

Over what timescale?

Edited by mirage

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The reason rates are normally higher for longer maturities is that people want a premium for tying their money up for longer. Just the same as when you receive better interest on a 1 year notice account than on an instant access. The higher interest reflects the fact inflation will erode the real return, and also to compensate for uncertainty over inflation (and over prevailing interest rates on instant access products).

It's true that people expect a premium for tying their money up for longer but that is not reflected in the yield curve. Prices on the yield curve are expectations of spot prices (for example 5 years from now).

Edit: Forgive me, what I have said is wrong.

Edit2: What I should have said was: If there is a premium, it is reflected in the yield curve, but there is no intrinsic reason why longer rates should be higher.

Bonds are optimistically overpriced. A 30 year bond has a yield of 4.50%. Its hard to see inflation not being above 4% within the next 30 years.

The yield curve can't be used as a guide to expectations of inflation because we don't have a free market. Normally money used to buy bonds would be removed from the rest of the economy but the existence of a central bank prevents that.

Edited by the_austrian

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I think a flat yield curve means -a moment of indecision -as in they don't know ,like when moving averages before a breakout,up or down

However I would also add I have not a clue what I am talking about :lol:

But i still think they don't know ;)

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recession - during a recession the YC often moves from inverted to normalised it indicates decllining near term risk premia

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  • 396 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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