The shape of the yield curve can be used to tell the market when there will be a recession or recovery. If the yield curve becomes inverted there is or likely to be a recession. If we used the inverted yield curve argument, we would have gotten a good heads-up on the potential for a recession. Interestingly, the recession was delayed longer than expected using this yield curve measure.
We can also look at the flex-point or fulcrum of the yield curve to tell when there will be expected recovery. If there is a extended recession, there is more likely to be be low rates and no inflation. Hence, if rates are continuing to move lower in the front-end then it is expected that the recession will continue. When rates start to increase, most likely because of inflationary expectation, there is a higher probability that there will be economic growth and rising prices. Since December, the fulcrum for the US yield curve has been around 2-3 years. The recovery will likely be delayed until the end of 2010 by this measure.
Now if we look at the European market we will get very different picture. Here the fulcrum of the yield curve is much further out the curve in the period of around 8 years. This suggest that the recovery will take much longer in the EU. This is consistent with the idea that the European banks which are more highly levered than in the US and have not reported as many loses will have a longer period of recovery. The ECB has also been thought to be slower at responding to the crisis so it would be expected that it will take longer to get a recovery.
Follow the prices and you will get a good view of the future.
We can also look at the flex-point or fulcrum of the yield curve to tell when there will be expected recovery. If there is a extended recession, there is more likely to be be low rates and no inflation. Hence, if rates are continuing to move lower in the front-end then it is expected that the recession will continue. When rates start to increase, most likely because of inflationary expectation, there is a higher probability that there will be economic growth and rising prices. Since December, the fulcrum for the US yield curve has been around 2-3 years. The recovery will likely be delayed until the end of 2010 by this measure.
Now if we look at the European market we will get very different picture. Here the fulcrum of the yield curve is much further out the curve in the period of around 8 years. This suggest that the recovery will take much longer in the EU. This is consistent with the idea that the European banks which are more highly levered than in the US and have not reported as many loses will have a longer period of recovery. The ECB has also been thought to be slower at responding to the crisis so it would be expected that it will take longer to get a recovery.
Follow the prices and you will get a good view of the future.
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