By Jennifer Hughes in New York, Financial Times
Published: August 28 2005 22:00 | Last updated: August 28 2005 22:00
US bondsThe US Treasury yield curve is poised to invert for the first time in more than four years, forcing long-term borrowing costs below short-term rates.
Inverted yield curves are unusual and in the past have often signalled a recession. For borrowers, the chance to take out cheap long-term loans is attractive. But for lenders, an inverted curve means they lose money on long-term loans. That can discourage them from lending.
Yields on two-year Treasury notes currently stand at 4.06 per cent while 10-year notes yield 4.18 per cent, a spread of just 0.12 percentage points. A year ago, the difference was 1.8 percentage points.
But in spite of the flattening curve, many bond traders doubt a recession is on the horizon.
Jason Evans, co-head of Treasury trading at Deutsche Bank in New York, said: âThe market is very much at ease with the idea that the link between the yield curve and the economy has in fact broken down.â
John Roberts, managing director of rates at Barclays Capital in New York, said: âThis is just a cycle, a great big trade that swings back and forth over time.â
Because bond prices move inversely to yields, many investors have been shorting shorter-dated notes on which prices have fallen and yields risen and buying longer-dated paper, where yields have fallen.
A bet of $100m (â¬81m) not large in Treasury market terms shorting two-year notes and buying 10-year paper would have netted $9.6m in the past year, a rate of return outstripping US equities.
Traders have largely attributed the flattening of the yield curve to growing demand for longer-dated paper, of which there is a shrinking supply. In particular, they point out that changes in pension regulations have forced some asset managers to buy longer-dated bonds so that their assets better match their liabilities.
While the US is not alone the yield curve on UK gilts has been inverted for some time, with no recession as yet traders are wondering how much further the current trend can go. âIf you caught this from the beginning, you've done well, but you should be starting to think where your exit point is,â said Mr Roberts.
Investors might already be eyeing other markets. Eric Wand, strategist at 4Cast Consultancy, said the eurozone might be next. âThe curve there is hugely steep, relatively speaking. People have seen this work really well in the UK and the US and we're just starting to see some of this in the eurozone,â he said.
Published: August 28 2005 22:00 | Last updated: August 28 2005 22:00
US bondsThe US Treasury yield curve is poised to invert for the first time in more than four years, forcing long-term borrowing costs below short-term rates.
Inverted yield curves are unusual and in the past have often signalled a recession. For borrowers, the chance to take out cheap long-term loans is attractive. But for lenders, an inverted curve means they lose money on long-term loans. That can discourage them from lending.
Yields on two-year Treasury notes currently stand at 4.06 per cent while 10-year notes yield 4.18 per cent, a spread of just 0.12 percentage points. A year ago, the difference was 1.8 percentage points.
But in spite of the flattening curve, many bond traders doubt a recession is on the horizon.
Jason Evans, co-head of Treasury trading at Deutsche Bank in New York, said: âThe market is very much at ease with the idea that the link between the yield curve and the economy has in fact broken down.â
John Roberts, managing director of rates at Barclays Capital in New York, said: âThis is just a cycle, a great big trade that swings back and forth over time.â
Because bond prices move inversely to yields, many investors have been shorting shorter-dated notes on which prices have fallen and yields risen and buying longer-dated paper, where yields have fallen.
A bet of $100m (â¬81m) not large in Treasury market terms shorting two-year notes and buying 10-year paper would have netted $9.6m in the past year, a rate of return outstripping US equities.
Traders have largely attributed the flattening of the yield curve to growing demand for longer-dated paper, of which there is a shrinking supply. In particular, they point out that changes in pension regulations have forced some asset managers to buy longer-dated bonds so that their assets better match their liabilities.
While the US is not alone the yield curve on UK gilts has been inverted for some time, with no recession as yet traders are wondering how much further the current trend can go. âIf you caught this from the beginning, you've done well, but you should be starting to think where your exit point is,â said Mr Roberts.
Investors might already be eyeing other markets. Eric Wand, strategist at 4Cast Consultancy, said the eurozone might be next. âThe curve there is hugely steep, relatively speaking. People have seen this work really well in the UK and the US and we're just starting to see some of this in the eurozone,â he said.
