Yield Curves

 

While the current USD yield curve is inverted, the same inversions are found in yield curves for Europe, UK, New Zealand, Australia and Canada. The Japanese yield curve is positive while the Swiss yield curve is inverted but not to the extent of USD, Europe, Canada, Australia and New Zealand.

The case for inversions were derived from spreads in 10 to 3M Vs 10 to 30’s then middle portions from 10 to 5’s and 10 to 2 years. The question to measurement emanates from the 3 month interest rate. The Swiss for example in the all important 3 month libor views an inverted yield curve while in 3 month vital Debt Register Claims, the yield curve is Flat. Since Saron trades directly in relation and close to 3 month Libor, Libor was clearly correct.

The yield curve from German 3 month rates clearly shows a correct up slope yield curve in relation to the 10 to 30 spreads but a deep dip in 10 to 5’s and 10 to 2’s. Correct is to view 3 month Eonia to see the European yield curve inversion. Yet the deep dive in 10 to 2’s and 10 to 5’s is still seen.

The overall purpose for yield curve views is an economic perspective rather than a currency trade. European yield curves to trade EUR/USD is an absolute futile experiment. Measured against spreads to other nations is more inane. Same for GBP and the UK, Australia and New Zealand.

USD. 10 to 3 month = 1.35 Vs 10 to 2’s = 0.98, 10 to 5’s = 0.44 and 0.54 at 10 to 30’s. Overall, 1.35, 0.98, 0.44 and 0.54. From 10 to 30’s to 10 to 3m = 81 basis points. Fed Funds trades 1.16. A further Yellen raise, inverts the yield curve further.

GBP. 1.09, 0.98, 0.62 and 10 to 30’s = 0.64. From 10 to 30 and 10 to 3 month = 64 basis points. Bank Rate is current 0.25. GBP interest rates trade below yield curves yet Europe is the opposite as Interest rates trade above yield curves. How the UK /Europe union lasted is astounding. GBP is far more closely aligned to USD. Current GBP interest rates trade miles below yield spreads. A good case for a raise yet a raise inverts the overall curve further.

CAD. 1.1, 0.70, 0.39 Vs 10 to 30’s = 0.38 for an overall 72 basis point spread from 10 to 3 month and 10 to 30’s. Canada Bank rate is 0.50.

AUD. 1.06 or 1.28 from OIS rates then 0.90, 0.52 and 0.27 from 10 to 15 year for a total of 79 basis points. RBA interest rate is 1.50.

NZD. 1.12 then 0.93 and 0.32 at 10 to 5’s. OCR current is 1.75.

Japan. -0.82, -0.81, -0.87 and 10 to 30’s = 0.80. Negatives translate as 0.18, 0.19, 0.13 Vs 0.80. Call Rates traded last 0.95, Tibor at 0.0081 and Euroyen 0.0080. View Tibor as 1.0081 and Euroyen as 1.0080.

CHF. 0.74, 0.26, 0.48 and 10 to 30’s at 0.38 for a total of 36 basis points. Swiss interest rate is minus 0.75 or 0.25.

Current GBP Inflation at 2.9% runs above the 2.0 target yet lower GDP in the last 4 quarters to Q3 2016 ran 0.2, 1.8, 1.9 and 1.8. GDP was viewed as Real GDP against annual percents.

USD Inflation at 1.9 experienced lower GDP at 1.2, 1.0, 0.8 and 1.0.

Japan Inflation at 0.4 experienced higher GDP at 1.2, 1.0, 0.8 and 1.0 to match USD.

NZD Inflation at 2.2 experienced higher GDP at 3.0, 3.1 and 3.0. NZD has problems however as Employmenet rate is 4.9% and its Current Account Deficit runs minus 3.1 as a percent of GDP.

AUD Inflation at 2.1 and the low end of the 2 to 3% range experienced higher GDP at 2.2, 2.4, 2.4 and 2.7. AUD interest rate is 1.50.

Brian Twomey

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