Chart of the Day: China’s Yield Curve flattening

By Edward Harrison On Jul 29, 2011

Andy Lees produced this chart via Bloomberg. It shows the Chinese 2-5 year swap spread flattening to 1 basis point. The last time it was this flat was 2008, during the global panic that followed the bankruptcy of Lehman Brothers.

Yield curves are useful predictors of future economic growth as they embed future interest rate expectations. For example, a negative-sloping yield curve for US Treasury bonds preceded six of the seven recessions since 1969 in the United States. This yield curve is telling us that markets anticipate Chinese policy easing in the future, presumably as a reaction to slowing growth.

Edward Harrison 7783 posts 575 comments

Edward Harrison is a senior Editor at Bloomberg. He is also the founder of Credit Writedowns newsletter, a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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9 Comments

zeropower says 13 years ago

you mean 2s10s, per ticker symbols.
1. Edward Harrison says 13 years ago
  
  I know the tickers look like it’s 2-10, but it’s actually 2-5.
baffled says 13 years ago

Same thing is happening in India as well. 2s10s are now down to 9 bps. On Tuesday, RBI (central bank) hiked rates by 50 bps (vs expected 25 bps) with very hawkish language. 5 year swap sold off from 7.50% to 7.70%. Today we are back at 7.50%, a full 50 bps of negative carry!
1. Edward Harrison says 13 years ago
  
  baffled, normally that should mean not just slowing but a brutal slowing. Why aren’t more people talking about the curve’s inversion?
  1. baffled says 13 years ago
    
    Beats me! There has been some chatter in the Indian newspapers about it, but very scattered. At the moment, everyone’s focus seems to be on inflation and the large fiscal deficit.
David Landro says 13 years ago

“Why aren’t more people talking about the curve’s inversion?” Either they’re scared, or they think it will go away if they don’t talk about it.
SethM says 13 years ago

Yeah but interest rates in China are politically determined… Seems that would take out most if not all of the predictive power.
Deborah Weir says 13 years ago

One thing I learned on the bond trading desk is that ALL interest rates are a political decision.

Some of us are taking inverted yield curves seriously – especially in emerging markets such as China. Howard Gold just interviewed me for his Bloomberg column, MarketWatch. He is reading my book, TIMING THE MARKET (Wiley, 2005) that uses yield curves to forecast markets and economies.

The inverted yield curve usually preceeds a weaker economy and stock market…even in China.

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