Daily Commentary BY THE CURVE TEAM –

Yields Tell Story

13th of July, 2021

The unwind in yields since the run up in February could be telling.

Prior to the beginning of the pandemic, commentators highlighted the inversion of the yield curve. This is when long term yields fall below short-term yields.

This is often taken as a signal of an impending recession. Although covid was unprecedented, the inversion of the curve ended up being associated with a global recession.

At the beginning of the year, longer dated yields on government bonds rose sharply as expectations of economic activity and inflation improved markedly. Since then, they have unwound much of the gains.

Central banks talk of tightening earlier than initially expected and ongoing covid fears from the delta strain mean markets could be expecting inflation and growth to be more subdued. Shorter term yields on the other hand have risen off the back of expected rate rises.

This is yet to amount to an inversion of the yield curve, but it has certainly flattened the yield curve. This could be interpreted similarly to an inversion – that not only are there subdued expectations for future economic activity, but there could be short term concerns for the economy as well.

Today, the NAB Business survey for June is released. This will give an idea of how recent covid outbreaks have impacted businesses. Curve’s monthly insights is also released today, which looks at the recent covid outbreaks, migration’s effect on employment and interest rates, and the rates outlook given recent RBA updates.

Josh Stewart

Associate - Money Market