tag:blogger.com,1999:blog-8702840202604739302.post4141147104390019182..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: Interpreting the yield curveDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-8702840202604739302.post-17471754942193944032017-11-29T08:16:16.273-08:002017-11-29T08:16:16.273-08:00I've read that a flat yield curve isn't pr...I've read that a flat yield curve isn't predictive of recessions outside of the US. Maybe a neoclassical model doesn't work outside of the US - but I suggest that the US is particularly sensitive to the yield curve because its non-bank finance sector is much larger.<br /><br />When a central bank raises its benchmark rate, commercial banks may not pass the fully rate increase on to their depositors (witness past year), but they always pass the rate increase on to their borrowers as quickly as possible. The higher cost to borrowers will slow the economy and loan demand - but not enough to cause a recession.<br /><br />Non-bank lenders tend to have their cost of funds tied to benchmarks that immediately reflect the rise in central bank rates - for example LIBOR indexed repo. <br />And non-banks often have long duration asset mismatches, while being less capitalized and less regulated.<br /><br />So a flat yield curve causes non-bank credit to shrink, weakens what are already less capitalized counterparties, generally exposes poor investment decisions, and may ultimately force asset liquidations. This is on top of an environment that isn't terribly bullish about long-term growth, as evidenced by relatively low long-term safe asset yields, and thus doesn't want to load up on credit risk.Anonymoushttps://www.blogger.com/profile/01440015860187489523noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-22383996366886975972017-11-29T04:27:03.505-08:002017-11-29T04:27:03.505-08:00Note, TIPS use CPI inflation which typically runs ...Note, TIPS use CPI inflation which typically runs 1/4 to 1/2 ppt above PCE inflation. You should use CPI inflation for your analysis. Ranahttps://www.blogger.com/profile/14812305181407361437noreply@blogger.com