Bond Yields are an important part of the financial markets. They have been a strong focus recently for ​​Shaun Richards, from Not A Yes Man Economics​. If you look at the beginning of the credit crunch, Central Banks thought that at first they could deal with it by cutting short term interest rates. That did not work and it did not get the response that they had initially expected. After this point they considered other interest rates, at the time the thought was that the short term interest rate was the solution to all problems.
After this gamble, they moved to longer term interest rates. This meant that they could influence what businesses pay, mortgage rates. In essence the beginning of Quantitative Easing. This is the lead in to the current issues. We have had flares of bond yields increasing in the face of crises in Europe. However now, everywhere you look yields are low. This goes counter to what economics suggests should be happening. Yields should be picking up higher. They are often forecast to move higher, however it never happens.
After the election of Trump bond yields did go higher. But if you look across a flat yield the gap between the start at end is very little. The 2YR yield is 1.8%, the 30YR is 2.71%. So if that market is correct, it is in fact telling us that there is not much to expect for the next 30 years! There is a further element to that, it would historically mean that a recession was on its way. What it does mean is that the Central Banks have levelled the market.
Whilst Bond Yields are in the control of Central Banks, then they will not rise much. There will be fluctuations, but they will stay in a tight range. With yields so low, it has in fact saved governments a lot of money. To see a real move now would require a very big crisis. We would need a new credit crunch to ever see yields move higher.
Shaun then discusses the possibility of Central Banks wanting to steepen the curve and how they would go around that. Finally they then look at the effect of yields on the man on the street; whether it be mortgage rates, pension rates.

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To see more of Shaun Richards on Core Finance please click here.  Please also visit Notayesmaneconomics for more information.


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