Yield curve inversion

[rawrschach]

The notion that an inverted yield curve predicts recession stems from the idea that as investors lose faith in the short term outlook demand shifts to longer term debt, which drives down yields and inverts the curve.

How about a situation where the demand/yield for longer term debt is steady but there is a sudden spike in short term yields? The curve is inverted but not via exactly the same process.

Any correlation to currency?

 

[rawrschach]

NObody?

Will I get more response if I make a thread about how I've been trading two weeks, made 30% profit on £100 and expect to be a millionaire this time next year™?

 

[alexaherself]

Will I get more response if I make a thread about how I've been trading two weeks, made 30% profit on £100 and expect to be a millionaire this time next year™?

Undoubtedly. And far more "views", too.

How about a situation where the demand/yield for longer term debt is steady but there is a sudden spike in short term yields? The curve is inverted but not via exactly the same process.

Any correlation to currency?

I'm much more of a statistician than an economist.

I suspect that there doesn't have to be at all. I think perhaps that was true, to some extent, in the past but isn't now.

I read your original post, and looked round for something I knew I'd recently read in an online business journal, which I thought was on a similar subject in that it alluded to the reasons why this is (probably) no longer so, but when I found it, it turned out not really to be as relevant as I'd thought. I think your question relates to the concept of "unexpected inflation risk" and that these days there doesn't have to be any real correlation between what you observe and currencies at all. I may be wrong! I think there aren't so many members left here with much knowledge of what you're asking about.

 

[alexaherself]

PS: I further suspect (but also can't prove) that part of the reason why that isn't still so relevant to currencies, as it once probably was, is that these days (and especially very recently, since there's been so much of an increase in automated, high-frequency trading) the overwhelming majority of forex transactions are "speculative" rather than "protective" in intent. Again, I may be wrong and am answering only hesitantly and in the apparent absence of anyone better informed.

 

[rawrschach]

Basically the situation I'm referring to is how emerging economies are dealing with depreciation vs the USD.

In Africa, Kenya has had the least loss of value in terms of currency but in May the USD broke out and quickly headed towards all time highs. Central Bank response has been to raise rates by 300 basis points since. The inverted yield curve manifested at the last bond auction where 3 month notes closed at 22%!