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Does The Yield Spread Predict Recessions In The Euro Area?
- Thread starter ASusilovic
- Start date
Hahaha, how dare you distract us from the important conversation about morganist's "school of thought", trefoil!!!Quote from trefoil:
Erm, um, if I may...
What causality were you talking about Mr. Martinghoul, way back there when we were just for one fleeetttinnngg moment discussing the yield curve?
I meant to say that the yield curve flattens because the mkt expects a recession. Whether the flattening, in turn, makes the realization of the forecast more likely or it's just that the mkt generally is good in forecasting recessions is not clear. My point is that it's not that the shape of the curve predicts recessions, but rather that the expected recessions cause the curve to flatten.
Quote from Martinghoul:
My point is that it's not that the shape of the curve predicts recessions, but rather that the expected recessions cause the curve to flatten.
Not to be dense, but I've tried to understand that sentence and I can't. Or rather, I don't see the difference between the two clauses. Kinda looks chicken-and-eggish. A little explanation?
Sure... Suppose you're a macro punter at a large hedge fund, for example. Let's say your resident economist, let's call him Marty F, tells you that he's forecasting a recession, based on a whole bunch of leading/coincident hard economic data. You agree and decide to go put on a ginormous trade to reflect this view. You go out there and put a flattener on. The mkt moves a bit. Take a few guys like yourself, as well as a few panicky real money investors, who decide that they'd better get out of their equities and buy bonds, and the curve changes shape. The next guy who looks at it says "look, this thing is forecasting a recession". See what I mean?Quote from trefoil:
Not to be dense, but I've tried to understand that sentence and I can't. Or rather, I don't see the difference between the two clauses. Kinda looks chicken-and-eggish. A little explanation?
Or it could be a different dynamic potentially, but the issue of causality is still there in pretty much every scenario.