Friday, May 12, 2017

China's Yield Curve Inversion


What is a yield curve inversion? When shorter tenure bonds have higher yield than long tenure bonds.

Why is this a problem? Banks won't lend out money because they wouldn't borrow short term money (typically cheaper, but now more expensive) to lend for the long term (typically higher, to pay back the borrowers + profit for the bank). It's not a difficult concept to grasp.

What happened in the past when a yield curve inversion happened? In China, it has never happened before (at least for the 10Y - 5Y). In the US, all 7 out of the 7 times that is has occurred has led to an economic recession.

Conclusion: Unless China has some magic bullet up their sleeve, this signals low inflation and low long-term growth. Economic recession looks imminent, especially with their WMPs looking more like WMDs. A crash in China assets and a devaluation of the RMB? Who knows!

4 comments:

  1. Hahaha... Weapons of massive poverty ... or prosperity?!?!

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    1. Maybe it depends on who you are? The rich get richer, the poor gets poorer? Aiyo haha

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  2. RMB weakening has been going on for some time. o avoid recession, they will weaken further. This will kind of mitigate their property price too.

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    Replies
    1. Hi Cory, yeah that seems to be a likely strategy that they would adopt. Much better to play with currency since such a method would not have so much domestic upset.

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