Daily Commentary BY THE CURVE TEAM –

Global Yield Curves Rapidly Changing Shape

13th November 2019

The loud chorus of “imminent recession” derived from an inverted 2/10s yield curve which reached minus 5 bpts in the US in mid August is a distant memory today. That spread has rapidly widened to 26 bpts whilst the overall yield curve from 4 week T-Bills to 30 Yr Treasuries is positively sloped from front to back.

The FED’s three rapid easings in 2019 have reconfigured the curve, injected liquidity and produced a wave of confidence that is producing an asset sector rotation momentum which may see out 2019 and well into 2020. Rising interest rates accompanying record breaking equity markets across all indices are drawing in significant amounts of cash which has sat on the sidelines in a risk off psyche for both debt and equity markets during most of 2019.

The normalisation of key global yield curves are also reducing their straddling of negative interest rates with the Japanese 10 year moving from minus 26 bpt in August to only minus 4 bpts today. It is clearly making significant progress toward being 1 bpt positive and may then operate within a range of +10 bpts to minus 10 bpts for the near term. It would be an ideal scenario for investors if 2020 is the year we return to normal shaped yield curves within the context of synchronised global growth and a resumption of reward for term risk. Potential risk premia is making a comeback! I hope the Australian Bank’s resume more generous 2-5 year rates to reflect this.

The nab business survey improved slightly in October, but remained at below average levels. Confidence rose from zero to +2, while conditions increased from 2 to 3. It would be good to see a sustained turnaround from the zero point and not head into negative territory. Let’s see if Christmas 2019 can be a catalyst for a positive start to 2020. Yield curves are predicting this.

Peter Sheahan

Director - Institutional Markets