woensdag 24 september 2014

This is why interest rates can't be raised

Janet Yellen may be telling us that she will increase interest rates next year (and the market believes that). But here is why it can't happen.

Because when we arrive at 2015, the long term bond yields (red and blue chart) will have almost intersected with the short term treasury bills (purple chart). We call this flattening of the yield curve.

If Janet Yellen even increases its interest rates half a percent, the 2 year treasury yields will skyrocket. The yield curves will flatten out and a recession will start, just like in 2008 where the yield curves were flat.

Note: A flattened yield curve means that all maturities (3 month, 2 year, 5 year, 10 year, 30 year bonds) have the same yield. This is typically a recessionary indicator.

Look how the 2 year bond yields go up because of Janet Yellen's talk about increasing interest rates.
2 year U.S. bond yields

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