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Other factors at this time, says Janet Yellen



The US Treasury yield curve inverted in 1966 and 1998. Guess what? No recession followed.

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

In today's ultra-low interest rates, it is unusual structural forces that push down long-term bond yields that help explain why the yield on two-year government securities is traded above 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's when the markets take that into account, but I really encourage that on this occasion it can be a less good signal .

"The reason for this is that there are a number of factors other than the market's expectations of the future path for interest rates that are depressing long-term returns."

Some of the probable reasons why Yellen said the US is not on track

Structural forces

First, central banks have bought large amounts of government bonds – artificially depressing long-term interest rates.

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

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

Australia Reserve Bank Governor Guy Debelle said on Thursday: "I'm not sure I would trust the yield curve, as the best signal of that risk given the yield curve has obviously not received the same kind of structure it has historically had. "

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

Second, an aging population offers them and for fixed income securities pension funds and life insurance companies when trying 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] Therefore, central banks' neutral rates are lower than before, which means the yield curve is naturally flatter and easier to turn.

Risks remain

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

Economic growth is slowing in China and Europe, with Germany struggling to to avert the recession – defined as two consecutive quarters of negative economic growth.

So the rationale for why "the time this is different" in the bond market will do little to prevent the fears of investors around the world.

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


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