And second, stock returns following periods of
steep yield curves are highly dependent on starting levels of valuation.
In a note sent out to clients on Thursday, the team of Shahid Ladha and Timothy High wrote there are several factors that point to even higher yields and
a steeper yield curve in the US.
Gundlach said he believes the days of negative interest rates are numbered, and
steeper yield curves are in the future.
Rotation towards assets, sectors, markets that benefit from higher inflation and
steeper yield curve may take longer to play out but destination is clear.
A steeper yield curve is seen as a positive for banks and other financial institutions.
We also like U.S. bank stocks, with
steeper yield curves set to boost lending margins, and prospects for deregulation and increased payouts.
Two sector trends stand out globally:
steeper yield curves and improving net interest margins have boosted profits for global financials, while long - term demand trends lifted technology revenues.
Ashwin Alankar of Janus Henderson published his latest article «Brace for
Steeper Yield Curves as the Wolves Return,» which highlighted grey wolf's role in maintaining a delicate balance in Yellowstone's ecosystem by keeping population of herbivores in - check, which in - turn reduced risks of overgrazing of young brush and trees in the park.
Also, on a fundamental level, if a growing economy supports
a steeper yield curve with a significant difference between long and short yields, banks stand to benefit from stronger earnings due to higher net interest margin and increased lending revenues.
The Fed's go - slow approach to raising policy rates and the Bank of Japan's (BoJ's) encouragement of
a steeper yield curve have lifted yields across major bond markets.
We see
a steeper yield curve ahead amid a gradual pivot toward fiscal expansion globally, although central banks still have the ability to limit any unwanted yield rises.
That could also lead to higher long - term Treasury yields and
a steeper yield curve.
Hedge funds are pushing the limits on
a steep yield curve as this is certainly a crowded trade.
Higher volume with the current
steep yield curve = higher profits...
The prospect for
steeper yield curves boost banks» net interest margins — the gap between lending and deposit rates.
In contrast,
a steeper yield curve is especially positive for financials, the greatest sector overweight in value stocks, and thus would be an encouraging indicator for a value market.
Despite a typical hiking cycle causing a flattening of the yield curve, we are potentially embarking on a path where yield curves may steepen significantly, as the Fed may be concluding that financial conditions (i.e. stock prices) can only be impacted by engineering
a steeper yield curve and higher term premium.
Risk assets (equities / credit) will have to come to terms with potentially higher volatility,
steeper yield curves and higher rates.
As we had seen following the BoJ announcement on September 24, the movement away from signaling ever increasing amounts of QE and negative interest rate policy (NIRP) means a better environment for bank stocks, as
steeper yield curves imply better margins and higher profits for banks.
And
steeper yield curves provide one of the avenues to achieve that outcome.
However, such investments depend upon leverage and
a steep yield curve in order to provide such generous yields.
But the underlying economic expectations that
steeper yield curves imply is of global reflation — higher growth and with it higher inflation.
What is not so obvious is the extent to which the U.S. economy and financial markets are betting on the continuation of unusually low short - term interest rates and
a steep yield curve.
We do not believe that is likely to change soon and
the steeping yield curve indicates continued expansion.
As we can see by following the blue line,
a steep yield curve is shaped like a normal yield curve, except with two major differences.
Hence, lenders tend to demand high yields which gets reflected by
the steep yield curve.
Several factors contributed to the change in expectations, including less supply of MBS to absorb due to a slow down in originations,
a steep yield curve making MBS an attractive investment, and the announcement that Fannie Mae and Freddie Mac will begin buying back about $ 200 billion in delinquent -LSB-...]
Borrowers will see their interest payments climb, especially those who have stayed floating rate to benefit from
the steep yield curve...
With
a steep yield curve, that was the wrong decision.
In addition, the present
steep yield curve makes borrowing cheap deposits and lending long - term at higher interest rates very profitable.
As its importance has increased, so has its profits, boosted by mortgage refinancings,
a steep yield curve, investment banking revenues, and generally strong financial markets.
A steep yield curve generally means that inflation expectations are rising or there is great uncertainty of the future, as it implies that people are either (1) reluctant to buy longer term bonds, or (2) are are keeping their funds liquid because they feel uncertain about the future.
I do think that the record
steep yield curve is the bigger story.
Coming into 2017, markets were poised for reflation, higher rates,
steeper yield curves, stronger dollar, weaker emerging markets, trade wars and higher volatility.
This makes banks to lend (as on
a steeper yield curve banks make more profits and it is worth the risk of lending) to value companies helping value companies to make more profits and expand.
For mortgage REIT issuers,
the steeper the yield curve, the better.
Not exact matches
He says financial conditions are easy, stocks are up, the
yield curve is relatively
steep, and economic indicators are looking solid — all factors he sees resisting a recession.
Treasury
yields retrace their climb on Monday after speakers from the Federal Reserve appear to open the door to a
steeper rate hike trajectory, a move that would flatten the so - called
yield curve.
BMO strategists say higher oil prices should ultimately lead to a flatter
yield curve, not a
steeper curve as seen last week
In particular, the removal of the
yield floor for asset purchases, currently set at the deposit rate, would make QE implementation much easier and the
curve steeper, especially if the ECB cuts rates more aggressively, but the Bundesbank seems reluctant to tolerate what could be viewed as indirect monetary financing.
That is probably a bad assumption in this case, after all, the proportion of Treasury issues out past 20 years is a small minority of Treasury issuance, and even with existing demand, the
yield curve is quite
steep.
4) In 1992 - 1993, the Fed held the Fed Funds rate down at levels that produced a very
steep Treasury
yield curve.
It would engender a loss of confidence if the
yield curve got really
steep, that the Fed was insolvent on a mark - to - market basis — that could lead to a loss of confidence in the dollar.
Large depository institutions suchs as Bank of America, JP Morgan Chase and Citibank may benefit from rising rates when the shape of the
Yield Curve becomes
steep, i.e. when the difference between short term interest rates and long term interest rates is large.
The top chart shows the favorable return profile of investing during periods where valuation is low and the
yield curve is
steep.
When the
yield curve was
steep and the market was as overvalued as it is currently, the average 1 - year return has been about 6 percent.
Using post-war data, when the
yield curve has been
steep and stocks have been favorably valued, the subsequent 1 - year return has averaged almost 18 percent.
On top of that, interest rates are rising and the
yield curve is getting
steeper, both of which boost financial institutions» profitability.
Yield curves that change to flat and
steep shapes are more frequent and have reliably preceded the expected economic cycles.
In one case the
yield curve is
steep and the bond is predicted to have a large capital gain before later falling in price.