Hello,

Economic theory tells us that investment markets tend to be forward looking. While equity valuations reflect what the market thinks about the future cashflows of a company, bond prices tell you what the market thinks about the future of a specific economy. The bond market can have a lot to say too, albeit often quietly. Attempts to decipher the message usually begin with good intentions, before quickly getting bogged down in a myriad of securities that each represent a different region, issuer, maturity, credit quality, etc.

 

A simple tool which is often employed when trying to forecast the economy is the yield curve, which is a plot of yields that can be attained at different maturities. In the Euro Area, the yield curve is currently upward sloping, which is the ‘normal’ shape economists expect to see as investors demand higher interest rates to compensate for the greater risk of inflation and interest changes over a longer holding period. In the US the shape is more irregular, with short-term yields exceeding medium-term yields.

 

As we have alluded to already, bond markets are complex, and analysing a yield curve requires a degree of granularity. For that reason, we’ll park our analysis here with a promise to return to this topic in next week’s edition of the Weekly Investment News.

 

As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.