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Pimco's new CIO Dan Ivascyn believes that the inverted yield curve has become less effective as a signal of impending recession.

https://www.bloomberg.com/news/articles/2017-06-22/pimco-s-ivascyn-says-next-inverted-yield-curve-may-be-different

Some see it as an almost surefire economic law: an inverted yield curve, when long-term bonds yield less than short-term debt, signals a coming recession.

That may not hold true in today’s world of unprecedented central-bank economic intervention, according to Dan Ivascyn, Pacific Investment Management Co.’s group chief investment officer.

Mr Ivascyn, being CIO of the world's largest bond fund manager, should know his stuff. However, I don't understand why. In fact, I thought the opposite should be true. The inverted yield curve should be more, not less, effective as a recession indicator thanks to central bank intervention. Here is my reasoning. Short-term interest is artificially low today thanks to central bank intervention. Therefore, it is harder for long-term interest rates to go lower than short-term interest rates because short-term rates are already artificially low. So, if an inverted yield curve still happens despite artificially low short-term rates, wouldn't it be a stronger signal of recession? What did I miss out? Please correct me.

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He's talking about central bank intervention in the longer maturities, not the short end. The Fed bought a lot of long dated Treasuries, which helped flatten the curve. Hence an inverted curve may reflect all the securities bought by the Fed.

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  • $\begingroup$ Looking globally, we've always got BoJ directly targeting bond yields (by keeping 10-year bond yield at 0), so you really can't draw much inference using conventional lens. $\endgroup$ – Helin Jun 27 '17 at 23:44

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