BREAKDOWN: Central Banks Sending Worrisome Signals About the Economy
CoinDesk Podcast Network
CoinDesk
4.8 • 689 Ratings
🗓️ 5 November 2021
⏱️ 10 minutes
🧾️ Download transcript
Summary
What the inversion of the yield curve is telling us.
This episode is sponsored by NYDIG.
On today’s episode, NLW gets macro with a discussion of a flattening of the yield curve and what increasingly seems like a failed yield curve control experiment in Australia. He looks at:
- What the “yield curve” is
- What a yield curve flattening or inversion is signaling
- The latest from the U.S. Federal Reserve on tapering
- Australia’s yield curve control problem
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NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW.
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“The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Nuthawut Somsuk/iStock/Getty Images Plus, modified by CoinDesk.
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Transcript
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| 0:00.0 | Welcome back to The Breakdown with me, NLW. |
| 0:09.1 | It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. |
| 0:16.3 | The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. |
| 0:22.6 | What's going on, guys? It is Friday, November 5th, and today we are talking about what central banks are telling us about the economy. |
| 0:31.1 | You might have read on Bloomberg or the Financial Times or something like that that investors are noticing a flattening of the yield |
| 0:39.1 | curve. Now, to discuss what that means, we should probably start by asking, WTF is the yield curve? |
| 0:46.1 | So glad you asked. The yield curve is a plot of all of the interest rates of sovereign bonds based on |
| 0:51.6 | their maturation. For example, the U.S. Treasury market is a nearly |
| 0:55.5 | $15 trillion market. It includes T-bills that have one month to one-year maturity, two years to 10 |
| 1:01.7 | years, as well as 20 and 30 years. And in general, you would expect the yield curve to slope upwards. |
| 1:08.3 | In other words, bonds with longer maturity would have a higher yield. This makes |
| 1:12.9 | sense because investors would expect more compensation for having a longer maturation period. |
| 1:18.4 | A longer maturation period means more risk, more expectation of inflation. In other words, |
| 1:23.3 | 10-year notes should have a higher yield, ceteris, paribus, than two-year notes. So what does it mean |
| 1:29.2 | when the yield curve flattens or inverts? Well, of course, it means that short-term bonds have a similar |
| 1:34.2 | or even higher yield than longer-dated bonds. It means there is more demand for those short-term |
| 1:39.2 | bonds, and often this presages recessions or other market turmoil. So what is the explanation for why this is |
| 1:46.5 | happening now? Well, in the U.S., it has to do with Fed policy. The Fed announced earlier this |
| 1:51.7 | week that they are going ahead with their taper of the $120 billion bond buying program that has |
| 1:56.7 | been in place since the beginning of the COVID crisis. This taper has been super, super clearly |
| 2:02.5 | telegraphed to investors, but many think that inflation will in fact force their hand faster, |
| 2:08.4 | compelling them to more quickly unwind bond buying and even getting into interest rate hikes |
... |
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