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UNDERGRADUATE ECONOMICS ASSOCIATION

BOSTON UNIVERSITY. UNDERGRADUATE ECONOMICS ASSOCIATION. Economic Discussion Series September 19, 2019. What is a Yield Curve?.

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UNDERGRADUATE ECONOMICS ASSOCIATION

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  1. BOSTON UNIVERSITY UNDERGRADUATE ECONOMICS ASSOCIATION Economic Discussion Series September 19, 2019

  2. What is a Yield Curve? • Representation of the yields of bond rates over time: Normally yields of longer bonds are greater due to the larger commitment/greater risk of lender not paying you back • Typical difference in return is 2.3 percent points between three month treasury bill and a 30-year treasury bond • Utilized as a way to gauge investor economic confidence

  3. What is an Inverted Yield Curve? • Predictor of the last 9 recessions • People think economy is going to fail soon? Flock towards long term bonds->Prices for long term bonds decrease and prices for short term bonds decrease (due to lack of demand) • Yield (return) on short term bonds becomes higher than long term • Basically people want a safe place to store their money

  4. Crash Course on Interest Rates! • https://youtu.be/C31c1sF9iys • Federal Funds Rate drops, overall interest rates for borrowing drop, becomes easier to start a new business, get loans: Meant to boost the economy • Paradoxically, this creates a lot of fear

  5. The article Key Slice of U.S. Yield Curve Becomes Most Inverted Since 2007 from Bloomberg • Yield curve became the most inverted since 2007, due to the trade friction • The 10 year yield was at lowest in September at 2.24% • Possible causes of yield to fall • Fall in stocks in Asia • U.S.-China trade prospects • Tensions in Europe • Likely for U.S. to go into recession in a year and a half

  6. What Next? • “Another low reading could spur traders to price in more rate cuts in 2019, potentially re-steepening the curve.” • However other countries like Germany also teetering on recession • Also, lowering rates also reduces Fed power to cut rates in the future in the face of a worsening recession. Limited use Source: Advisor Perspective

  7. Impact of Inverted Yield Curve on Consumers • Consumers with Adjusted Rate Mortgages have interest rate schedules that are periodically updated based on short-term interest rates • A higher short term interest rate, would mean that the investors would have to pay higher interests. • Consumer’s would have to dedicate a larger portion of their incomes toward servicing existing debt • Reducing their purchasing power Source: Investopedia

  8. Questions for discussion • Do you think market uncertainty will continue or lessen in the near future? • What markets do you see benefiting or staying stable within a hypothetical recession? • Since the economy is a reflection on expectations is discussion of recessions overall harmful or beneficial ? • Apart from decreasing the interest rate what other measures can be taken to prevent the hypothetical recession?

  9. Additional Resources • https://www.bloomberg.com/news/articles/2019-05-28/key-slice-of-u-s-yield-curve-dives-further-into-inversion-zone?fbclid=IwAR0Y1COn8s3cSAV3E2Vi8NI2ekgo9EXnNLwO73qehEob3YYGl3sbl5SNz20 • https://markets.businessinsider.com/news/stocks/yield-curve-inversion-explained-what-it-is-what-it-means-2019-8-1028482016#what-is-the-yield-curve-1 • https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/bond-yield-curve

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