Yield curves are flattening in the US and Europe – what could this mean for the global economy?
A typical yield curve is ‘upward sloping’, i.e. where short-term Treasury bonds demand lower yield rates than longer-term Treasury yields. However, the US yield curve has flattened compared to last year, with short-term yields rising while long-term yields have fallen.
Historically, a flattening or inverted yield curve precedes a recession, as it implies that money lenders anticipate that there will be less demand for borrowing in the future, so when they lend long-term, they lend at lower interest rates in order to stimulate demand.
One year Yield Curve Comparison (US)
However, this flattening of the yield-curve may not necessarily indicate that a US recession looms. There could be other explanations for the flattening:
- As geopolitical uncertainty leads markets to become less stable, money from around the world flows into the safest investment - this being long-term Treasuries - thus pushing up demand for long-term US Treasuries, driving up their prices, and therefore causing the long-end of the yield curve to flatten (i.e. to fall); and
- The fact that US treasuries are offering high yields versus other investment grade (AAA rated) sovereign yields makes them more attractive to investors, and pushes up prices and thus lowers long-term yields, thereby flattening the curve
Meanwhile, European yield curves have also flattened over the past year, though to a much lesser extent. However, when looking at Malta, the yield curve does not seem to be inverting but shows a quasi-parallel shift, moving downwards slightly. These results do not appear to reflect what is happening in the US and Eurozone markets, showing that Malta’s money markets continue to be stable for the time being.
This ties in with Malta’s strong recent economic performance and the robust macroeconomic outlook, as GDP growth is expected to remain high from a historical perspective over the short-to-medium term.
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