Why Is the Market Worried About Color Correction

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sohag
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Joined: Mon Jul 04, 2022 6:30 am

Why Is the Market Worried About Color Correction

Post by sohag »

On April 1, the latest U.S. employment data was still quite strong, raising market expectations for a two-yard rate hike by the Federal Reserve at its May meeting, while two-year U.S. Treasury yields have caught up with 10-year yields. Yields, otherwise known as "yield inversions," have raised concerns in the market. Why is the market worried about a yield inversion? "Yield inversion" refers to the fact that long-term bonds have lower yields than short-term bonds, and the market mostly focuses on the spread between ten-year and two-year yields.

The following picture shows the ten-year-two-year bond interest rate spread from June 1976 to April 2022. It can be seen that in the past 40 years, there have been six times of yield inversion (this time The seventh time), and shortly after the inversion of the yield rate, all of them entered a recession period (indicated by the gray bottom), so the inversion of the yield rate will cause market investors to worry. a Author provided What caused the yield inversion? Generally speaking, the credit risk and price risk of long-term bonds are higher, so under normal Color Correction
circumstances, the interest rate of long-term bonds should be higher than that of short-term bonds.

Let's look at a simple example first. Assuming that the market expects that interest rates will rise in the future, and the one-year interest rates in the next three years will gradually increase, which are 1.0%, 1.5%, and 1.6%, then the reasonable three-year interest rates at this time will be these three one-year interest rates. Geometric mean of interest rates: More about this source textSource text required for additional translation information Send feedback Side panels
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