What Could Go Wrong in 2018? Part 1 (of 4) – Global Bonds

by Michael J. Howell6. December 2017 16:07

We remain firmly of the view that long-term yields will rise. The recent flattening of the US yield curve is almost entirely explained by rising short rates rather than falling long rates. Moreover, this flatter curve is unlikely to signal upcoming recession and a scramble for ‘safety’, because the curvature of the term structure remains low and the hump is positioned at a relatively long tenor. In short, a flat or inverted yield curve is a necessary, and not a sufficient, recession condition. Rather, US term premia have been exceptionally depressed over the past three years by massive inflows of cyclical ‘flight’ capital from Europe and EM. A heads-up to the direction of these flows can be taken from the performance of the Chinese economy and our estimates of Chinese term premia, both of which are rising. 2018 should see 3.5% tested on the benchmark US 10-year yield.

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