20180622-NATIXIS-Should_the_flattening_of_the_US_yield_curve_be_analysed_the_usual_way__6页_751kb

Flash Economics Summary: US Yield Curve Flattening

Core Content

The document titled Flash Economics dated 22 June 2018 discusses the interpretation of the flattening of the US yield curve, particularly in the context of economic growth and bank credit supply. It challenges the conventional understanding that a flattening yield curve always signals an economic slowdown or recession.

Main Points

1. Historical Significance of Yield Curve Slope

• The slope of the yield curve was historically a leading indicator of future US economic growth, particularly in the 1980s.
• However, this relationship has weakened since the 1990s, indicating that the yield curve is no longer a reliable predictor of growth.

2. Current Flattening of the Yield Curve

• The current flattening of the US yield curve is not due to a decline in expected short-term interest rates, but rather to a fall in the term premium.
• The term premium reflects the compensation investors demand for holding long-term bonds over short-term ones. A decrease in term premium indicates a shift in investor sentiment, not necessarily a pessimistic outlook on economic growth.

3. Factors Contributing to the Term Premium Decline

• Low core inflation variability: This reduces uncertainty about future interest rates, leading to lower term premiums.
• Global liquidity abundance: Central banks’ large bond holdings have increased demand for long-term bonds, lowering term premiums.

4. Yield Curve and Credit Supply

• The flattening of the yield curve does not automatically imply a contraction in bank credit supply.
• Historical data shows that credit growth has remained strong even when the yield curve flattened.
• The Federal Reserve's survey on credit supply conditions also indicates favourable credit availability during such periods.

5. Conclusion

• The flattening of the US yield curve should not be interpreted as a direct signal of economic slowdown or credit contraction.
• It is essential to distinguish between a flattening caused by a fall in expected interest rates (which may indicate weak growth) and one caused by a fall in the term premium (which does not necessarily imply weak growth).

Key Information

• Charts 1A and B: Illustrate the flattening of the US yield curve in recent periods.
• Chart 2: Compares the yield curve slope with GDP growth, showing a weak correlation in recent years.
• Table 1: Provides correlations between the yield curve slope and GDP growth over various periods, highlighting that the yield curve is no longer a strong leading indicator.
• Charts 5A, B, and C: Demonstrate that credit supply remains strong during yield curve flattening, contradicting the traditional view that banks reduce lending.

Disclaimer and Legal Information

• The document is intended for professional and qualified investors only and is strictly confidential.
• It does not constitute a personalized investment recommendation or a financial analysis.
• No liability is accepted by Natixis for the distribution, accuracy, or completeness of the information.
• The document is subject to regulatory restrictions in various jurisdictions, including France, the UK, Germany, Spain, Italy, Dubai, Canada, and Australia.
• Investment decisions should not be based solely on the information provided.

Final Note

The document emphasizes the importance of context and interpretation when analyzing the yield curve. It advocates for a more nuanced understanding, considering factors such as term premiums and credit supply trends, rather than relying on traditional interpretations that may no longer be valid.