The CrossBorder Capital Blog

Recession Watch – Yield Curves Can Predict Future Crises, But You Have To Focus More on Curvature and Term Premia Than Slope   This report argues that the yield curve slope, by itself, is not a robust predictor of future recessions. Other yield curve parameters need to be taken into account and, specifically, the size and position of the curvature hump in the term structure. In other words, we emphasise curvature and, by implication, the importance of term premia. Not only have term premia recently fallen in size – so indicating greater demand for ‘safe’ assets by investors – but their distribution has become more positively skewed, which has been a better predictor of upcoming recession than the simple yield curve slope. The implication is that the US Fed’s slated future ‘forward guidance’ path may be too aggressive.

As Global Liquidity conditions tighten further, we accept that the next few months will prove more challenging for Emerging Markets. Credit is a particular problem and the downside risk is that EM debt spreads could add a further 200bp versus US Treasuries. However, a positive note is that EM domestic fundamentals look far better than during previous crisis periods. In particular, net capital inflows appear surprisingly firm in contrast to recent Press reports. In sum, the EM outlook is poor largely because of external factors, but domestically it does not look a disaster.         See our latest published research, Global View Re-Assessing Emerging Markets: What Now? – July 2018   Please find either a link to our website, or an email attachment.  For further information, or to change user options, please contact us at crossbordercapital@liquidity.com          ————————————————————————————————————————————————————————— Audley House, 13 Palace Street, London SW1E 5HX Tel: 0203 954 3430