Reading The Yield Curves

Bond Markets can give us some very good insight into what is in store for the economy:

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After the latest round of economic data (and remember that central banks are now "data dependant" as to the future of any changes in their monetary policies) this what the Yield Curves are telling us:

Europe:

• Using German Government Bond yields as our proxy for Europe:
• Short-term yields are actually slightly negative.
• Deflation remains a concern in the near term.
• However as we move out the "curve": (to the right) there is a slightly positive rise in yield which signals that expectations are for the potential of improving economic growth and a return to mild levels of inflation in the longer term.

  US:

• Current short-term yields are near 0% reflecting some concern over recent inflation data below the Fed's targets.
•  However, stronger economic growth expectations are shown in the steepening "curve" as we move out to the right.
• Bond Markets are building in short-term interest rate increases after 6 months (possibly September).
• With expectations of increased future inflation, bond investors are demanding yields of better than 2% in the 10 year maturity.
• Financial markets will focus on this weeks latest reading on employment data (for February), especially wage growth, for clues to what the Fed will do next and when.

Canada:

• A mildly "inverted" yield curve in the short-term indicates expectations of continuing slow economic growth, but likely not a recession.
• Further out the curve, the positive slope suggests expectations for improved economic conditions, not as strong as the US, but somewhat stronger than Europe.
• The BOC will announce it's latest policy decision tomorrow, the consensus expects no change in interest rate policy.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.