The Market Finally Has Its Inversion. Now What? - btbirkett@gmail.com - Gmail

The Market Finally Has Its Inversion. Now What? - btbirkett@gmail.com - Gmail



Falling yields make it harder for pension funds to guarantee an income. Many around the world are now obligated by regulators to buy bonds to be sure that they can meet their liabilities, which helps to create a vicious circle. Lower yields mean that the funds need to buy more bonds, which pushes down yields further, meaning that they need to buy still more bonds to generate the same interest income. Further, much of the current buying is part of a straight “carry trade,” as investors desperately try to find a positive yield somewhere.



... Banks make their money by borrowing for the short-term from depositors and lending at higher rates for the longer term. When those rates invert (or merely flatten), it becomes far harder for them to make profits. They have less incentive to lend, and they have less capital with which to withstand any risks. The inverted yield curve has quite rationally spurred a tumble for bank stocks in the U.S. and particularly in the euro zone. Banks are arguably less important to the U.S. economy than they were a generation ago; they are still central to the European economy, and further problems for European banks will create problems for the U.S.



;... And at present, the differential between the yields available in the U.S. and Europe is so wide that it puts huge upward pressure on the dollar, something that Trump wants to avoid.