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Other factors play this time, says Janet Yellen



The US tax capacity was inverted in 1966 and 1998. Guess what? No recession followed.

Former US Federal Reserve Chairman Janet Yellen: "I think the US economy has enough strength to avoid [a recession] but the odds have clearly risen and they are higher than I am truly comfortable with." Photo: AP

In today's ultra-low interest rate world, there are unusual structural forces driving long-term bond yields that help explain why the interest rate on two-year government bonds traded over the 10-year bond yield for the first time in 12 years.

Yellen said: "Historically [the yield curve inversion] has been a pretty good signal of recession and I think that is when the markets pay attention to it, but I really want to urge it on this occasion it can be a less good signal.

"The reason for this is that there are a number of factors other than market expectations of the future interest rate path that drive down long-term returns."

These are some of the probable reasons why Yellen said the United States is not likely heading for the recession, as the inverse yield curve suggests.

Structural forces

First, central banks have purchased large amounts of government bonds – artificial depression of long-term interest rates.

The world's three largest central banks – the US Central Bank, the European Central Bank and the Bank of Japan – have a total of $ 14.2 trillion US assets in the balance sheet.

Although the Fed's balance sheet has shrunk, BoJ has added to its asset purchases.

Accordingly, Deputy Governor of the Reserve Bank of Australia Guy Debelle said on Thursday, "I am not sure I would trust the yield curve because the best signal for that risk given that the yield curve has obviously not received the same type of structure as historically. "

" The term premium "- extra-return investors usually require the risk of holding long-term bonds – can be" negative, "he said.

Secondly, an aging population offers them and interest-bearing securities of pension funds and life insurance companies as they try to manage their long-term assets and liabilities.

Third, inflation appears to be structurally lower due to the tectonic forces of globalization and digitization of the economy. [19659004] The central banks' neutral interest rates are thus lower than before, which means that the yield curve is naturally flatter and easier to invert.

Risks Still

Yet, there are obvious risks to the global economy, mainly from the US-China trade and technology war, which Debelle warned of delayed business investment around the world.

Economic growth is declining in China and Europe, with Germany struggling to stave off the recession – defined as two quarters as a result of negative economic growth.

So the reasons why "time is different" in the bond market will do little to prevent the fear of investors around the world.

As former political consultant to President Bil l Clinton, James Carville once famously said of his preferred reincarnation, "I want to come back as the bond market – you can scare everyone."


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