The yield curve on government debt — the gap between how much long-term bonds pay out versus short-term ones — is at its lowest level in more than a decade, and opinion is somewhat divided on how bad a sign it is for the economy.
Under normal circumstances, the yield on long-term bonds should be much higher than the yield on short-term ones to properly reward investors for the risk of waiting longer to get paid, particularly since inflation can eat away at value over time.
At various times over the past decade, the gap between long-term and short-term yields has been as high as four percentage points — or as much as 400 basis points, to use the Bay Street parlance. But lately, gaps around the world have shrunk to their narrowest point in years, leaving many experts to wonder when it may invert.
If that happens — if long-term yields dip below short-term ones — it could be a sign investors are losing confidence in the economy over the long haul. And that's a very serious situation that some economists say could throw the economy upside down.
"Markets are very firmly focused on the shape of the yield curve and its potential to invert," says Frances Donald, Manulife's chief economist. "Particularly the U.S. one."
Do they actually cause recessions, or merely show up ahead of one that was already on its way?
- respected pundits are saying Not yet, but be prepared.
- try to quantify the relative weight of a factor like this as part of a probability estimate
- consider expressing this in p-adic terms ...
- if only in the perspectives of potential collaborators.
- BrExit may be just political SoundAndFury, signifying nothing.
- Review Calculated Risk for significant trends.
- Most trusted pundits do not see this as a major risk, yet.
- The most vocal pundits appear to be inciting immediate action,
- perhaps for their vested interests
^ Citations