We track different indicators to predict next market/economic move. One strong indicator to predict economic cycle worldwide is 'spread (difference) between long term and short term government bond yields'. Yield Curve Inversion occurs when this spread becomes Nil. Historically such invesions were followed by Recessions.
We hereby attach chart showing difference in yield between 10-years(long term) and 3-months(short term) Indian government bonds. We also add BSE Sensex above this spread chart for meaningful comparison.
If we check above chart we see how in last 5 years spead peaked/bottomed before BSE Index. Also we note in 2008 spread started rising immediately after falling below Nil but this time in 2011 we are yet to see decisive upmove in spread to confirm upturn in India's economy and thus BSE Sensex. We will continue to post updates.
We hereby attach chart showing difference in yield between 10-years(long term) and 3-months(short term) Indian government bonds. We also add BSE Sensex above this spread chart for meaningful comparison.
If we check above chart we see how in last 5 years spead peaked/bottomed before BSE Index. Also we note in 2008 spread started rising immediately after falling below Nil but this time in 2011 we are yet to see decisive upmove in spread to confirm upturn in India's economy and thus BSE Sensex. We will continue to post updates.
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3 comments:
Hi Jigs,
I wish you and your dear ones a happy new year.
I have a query on the following statement of yours. "...Historically such inversions were followed by Recessions". By recession here, did you mean markets bottoming out situation OR, the economy in general going into a prolonged recession?
Regards,
Sandriano
Sandriano,
You can read basics on yield curve inversion on wikipedia: http://en.wikipedia.org/wiki/Yield_curve#Inverted_yield_curve
On your question: We must see clear upmove (like we saw in 2008) in spread to conclude risk of long recession being over because as of now if you see spread is moving near Nil which is scaring. Remember OECD CLI has also NOT started upmove.
I cannot imagine what will happen to the united states if china and all the countries and all investors the world over shun the dollar. What a nightmare. Interest rates would rise and the federal reserve would be forced to buy bonds from the treasury to fund the government and pay interest on all of the governments bills notes and bonds. When the buyers for united states debt obligations disappears the whole system will come crashing down. This is the type of thing that peter shiff has been warning everyone about when the ability of the united states to pay its debts becomes clearly in doubt all the buyers for united states debt securities disappears overnight.
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