Chart of the Day: China’s Yield Curve flattening

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.

China 2-5 swap

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.

  1. zeropower says

    you mean 2s10s, per ticker symbols.

    1. Edward Harrison says

      I know the tickers look like it’s 2-10, but it’s actually 2-5.

  2. baffled says

    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

      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

        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.

  3. David Landro says

    “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.

  4. SethM says

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

  5. Deborah Weir says

    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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