Investment

Chart of the Month – What’s going on?

by Pierre Mouton

What’s going on?

Source: Bloomberg

 

The US yield curve is flattening at a steady pace. One of the most followed indicators, the 2-10 year differential, has more than halved since the beginning of the year, from 125 basis points to less than 60 bps today.

Traditionally, a flattening yield curve is a warning signal for lower economic growth, and in some cases, notably when it gets into negative territory – i.e. an inverted yield curve – for a recession. Although we’re not in that situation, this rapid flattening of the 2-10 year slope raises questions, especially when all lights seem to be flashing green: global economic growth is strong, Europe and Japan show at last real improvements, Emerging Markets and China are roaring ahead, US employment is extremely steady, and the list goes on.

Besides all these positive indicators, it is also noteworthy that, apart from Venezuela or Turkey, there is no imminent catastrophe looming, at least apparently.

So what is the US yield curve telling us or, in other words, is there something we should really worry about?

First of all there are technical reasons for this flattening: the Fed has announced it will raise interest rates as soon as December this year, with further hikes planned next year, which exerts upside pressure on 2 years yield, while at the same time, tame inflation figures tend to put opposite pressure on longer term yields. The fact that the Fed has also declared that QE was now behind us should eventually have increased prospects for higher long term yields, but the Fed was and is not – by far – the only buyer of long dated Treasuries and strong hands have been on a buying spree of late: foreign holdings of US Treasuries have increased by more than $ 300 billion this year, led by China in particular.

Then, in a world craving for yield, getting 2.5% on one of the safest and most liquid assets in the world (the US 10 year T-notes) is clearly attractive. There is almost no equivalent in the developed world, and perhaps the most strikingly comparable comes with Portuguese 10 year yields which barely reach 1.9%!

But let’s not be complacent; most US recessions were preceded by a yield curve inversion with a negative 2-10 year slope. As we get closer to zero, more and more investors will start fretting about a possible recession and become more cautious. Although we’re not in the recession camp as we see no signs of it in today’s markets and economy, we’ll keep on closely following any deterioration in what could be qualified as a Goldilocks environment. For the time being, enjoy strong equity markets, but don’t overlook the possibility that something bad and unpredictable happens….

 

Return to listing
back to
the top
Antonio Mira
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE COMMITTEE

Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
An experienced bank auditor, Antonio started his career in 1995 with Arthur Andersen, where he worked for some 7 years before joining Ernst & Young in 2002 as a Senior Manager.
Antonio is a Swiss chartered accountant and a Business graduate of Lausanne University (HEC).

Sébastien Poiret
DEPUTY HEAD OF WEALTH MANAGEMENT

Sébastien Poiret joined NS Partners in 2008 and manages funds of hedge funds and private client mandates. He also oversees the development of the Group’s offices in Mauritius.

Prior to joining NS Partners, he served as a Trader, Head of Manager research and Portfolio Manager in the USA and Switzerland for a single hedge fund (1998-2004) and for Optimal (2004-2008), Grupo Santander’s fund-of-hedge funds operations.

Sébastien holds a Bachelor’s degree in Corporate Finance from the ESPEME Business School (EDHEC Group) and an MBA in Finance and Economics from the Institute of Business Administration, both in Nice.

Abir Oreibi
BOARD DIRECTOR

Abir Oreibi joined the Board of the NS Partners Group in 2018, where she brings her truly international perspective and rich experience.
Among many other ventures, Abir set up Alibaba.com’s first European office. After living and working in Shanghai, Hong Kong, Bangkok and London, she now lives in Geneva, where she is CEO of Lift Events, an organization that identifies technology trends, their business and social impact through the organization of events and open innovation programs. Issues related to the challenges and opportunities created by new technologies as well as the strategic responses from organizations are at the heart of Lift’s activities.
Abir holds a BA in Political Sciences from the University of Geneva. She is an investor, and member of advisory and innovation boards.

Romain Pidoux, CAIA

Add Your Heading Text Here

Romain Pidoux joined NS Partners in 2011 and heads the Group’s Risk Management.
He started his financial career in 2005 as Head of Quantitative Analysis for a Swiss Family Office, selecting funds and managing portfolio allocation. In 2008, he switched to the alternative world and joined Peak Partners as hedge funds analyst.
He is a Chartered Alternative Investment Analyst (CAIA) and holds a Master’s degree in international relations from the Graduate Institute of International Studies at Geneva University.

Your browser is not supported. Please use another browser.