01 07 2018 | by Victor Xing | Capital Markets
12 04 2017 | by Victor Xing | Central Banks
Bond market term premium and wolves of Yellowstone
10 17 2017 | by Victor Xing | Capital Markets
How we learned to stop worrying and love the “fake markets”
09 20 2017 | by Victor Xing | Central Banks
QE’s distributional effects a rising political liability
04 18 2017 | by Victor Xing | Capital Markets
Persistent low volatility threatens active fund managers
02 17 2017 | by Victor Xing | Economics
Looming risks through the prism of bifurcated housing market
01 11 2017 | by Victor Xing | Economics
Financial risk contagion: China’s capital outflow
12 22 2016 | by Victor Xing | Economics
November PCE: dollar strength weighed on goods inflation
12 14 2016 | by Victor Xing | Central Banks
A less-hawkish interpretation of the December FOMC
12 02 2016 | by Victor Xing | Economics
November Payrolls and Governor Powell on risk management
10 20 2015 | by Victor Xing | Capital Markets
Why do yield curves flatten during period of deflation?
Period of deflation is usually associated with tighteningas investors and consumers become less averse to holding cash (please see ). This ultimately reduces availability of credit to fund consumption and investments, thus lowering future growth and inflation.
Since long-term interest rates are correlated with future growth and inflation expectations (investors would demand higher yield to compensate for higher future rates, as higher rates dilute future payments of fixed income cash flows), lower growth and signs of deflation will push down long-term bond yields. Assuming the Federal Reserve keeps policy on-hold, short-term interest rates will remain well-anchored, or mostly unchanged. The combination of both effects will tighten the spread between short-term and longer-term bond yields, or in a more severe deflationary scenario, invert the yield curve.
Another example involves tighter FED policy – if the FED is on a war path to fight future inflation by hiking short-term rates, investors will similarly react to tighter future credit availability, slower future growth and higher risks of deflation. In this case, investors will sell short-term Treasury notes and buy long-term Treasury bonds, because they don’t want to be holding short-maturity bonds in a policy tightening environment, and they want to hold long bonds as FED’s actions will lead to less growth and inflation. As a whole, this will push up short-term interest rates and keep long-term rates unchanged or even lower, again tightening the spread between short-term and long-term rates.
Next article10 20 2015 | by Victor Xing | Economics