I'm still a learner in this field. Yield curve is meant to be a leading indicator. Here is a summary of what I understood. Yield curve is usually upslope in good times. Shorter term yield having lower yield than longer term. Reason being longer term bond has more risk so investor tend to expect a higher rate.

At times when the economic cycle starts to reverse, the yield starts to flatten. With investors buying more of longer term bond to lock in the higher yield (expecting it to drop in future) hence driving down the yield. As investors expect bad economy looming which will result in lower yield, there will be less demand for short term bond, hence the rise in its yield.

Up to a point when the yield curve inverts, then a recession is imminent or just around the corner.

Just my thoughts, I'll made this into a post when I have more data to backtest.

https://www.bloomberg.com/news/articles/20...

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diyquant

Reply to @bgting : Thanks, was analysis previously too. Good thing is its chart is since 1960s

ivanhoe

They were discussing if it's a mistake with the Feb. I think it's a better gauge if u compare US 2 yr bond and 10yr note

diyquant

Reply to @ivanhoe : I'm trying out using 10yrs vs 3mths. The Fed was saying due to lack of inflation, the yield curve flattening cannot be used as a recession indicator for current yield curve flattening

Ccm

Very interesting concept... pls update us

diyquant

Reply to @YokeMing : no problem, will find some time to do this =)

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EDMW_Capital

Good to see a budding Quant here! The inverted yield curve is indeed a leading indicator, though it's not useful by itself unless you are trading the curve itself. It gives you a clue to the view of the economy, and funds use it as a discounting mechanism to make money from GDP predictions.

The level of the various bond rates, the direction at which they are heading and the velocity of interest rate change are all important factors in analyzing the various GDP. Take note that the FOMC has historically reacted to the economy growth when increasing or decreasing rate, i.e. the rate by itself is a lagging indicator to the GDP.

diyquant

Reply to @EDMW_Capital : lots of new ideas to digest here =p good to know. Are you working in an investment firm? Your knowledge is quite in-depth.

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wellhandy

Bad omen please sell everything. *Deadpan face*

ThumbTackInvestor

I wouldn’t call it a leading indicator.
Afterall, it’s just a reflection of the collective sentiment of everyone
If everyone thinks the markets r gg downhill, suddenly further out safety is more valuable
So safer assets like bonds are greater in demand longer term. That increases the prices of bonds
N since pricing is inverse to yield, price goes up means yield comes down and hence “flattening” of the yield curve
Happens not just to bonds, but volatility derivatives as well
At the end of the day, nothings really “predictive” except pure data
This is just a reflection of the general sentiment

duckie

Too chim. Buy happy meal instead

duckie

Reply to @diyquant : i spent it on toto. hit one number only. most numbers i ever get...

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Unintelligent_Nerd

Interesting post. On my end, I am trying to learn more about the impact of the yield curve on market crashes. There is a book by Ziemba, Lleo, and Zhitlukhin titled "Stock Market Crashes" where they present their findings of various mathematical models predicting a market crash. One of which is the Bond-Stock Earnings Yield Differential model where you subtract the earnings yield from the long-term bond yield, and with that result, create a distribution of the differences between the two. Once the difference hits a certain cut-off, it is "highly likely" that a market crash is on the way.

Anyway, the researchers vary the period of data that is used and the results are quite consistent in "predicting" a market crash. I am still trying to wrap my head around it. I could pluck daily bond yields from the Singapore Government Securities website but am unsure about where I can get data on the earnings yield. Preferably the earnings yield of STI ETF? (Wait........do indexes even have earnings yield?) If I managed to get my hands on the data, I might do a blog post on it.

bgting

Reply to @Unintelligent_Nerd : To be exact, that's referring to Straits Times Index. STI ETF tracks the index.

You can find the fact sheets here.
http://www.ftse.com/products/indices/SGX-ST

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LevelUp

Not sure if the yield curve concept applies to things like the Singapore Savings Bond as well?

The interest rates curve for SSB seems to be flattening in the recent months, i.e. higher interest rates in the earlier years and lower interest rates in the later years

LevelUp

Reply to @Unintelligent_Nerd : Thanks for sharing your views!
I am not too familiar with T-Bills/SGS bonds/SSBs and can't contribute much too.
Would love to hear the thoughts from the experts here too!

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sysy

Thanks... I waiting ur post :)

diyquant

Reply to @sysy : Welcome, will do the analysis first =)

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