The debate on higher rates: let battle commence – The Property Chronicle
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The debate on higher rates: let battle commence Top economists Peter Warburton and Robin Marshall debate where rates are headed next

The Economist

Robin Marshall has responded to Peter Warburton’s article titled ‘What does the flattening yield curve mean’. 

The first paragraph ends with a perfectly reasonable question about the information content of a flattening yield curve and whether it signals the end of the US/UK expansion. However, the final question about buying bargain basement long-dated bonds seems mis-specified, since the flatness of the curve means an investor gets very little extra yield from buying long-dated bonds (eg, current US 30 year yield is about 3%, but the 10 year yields 2.85%, so pick-up is only 15bp for an extra 20 years of inflation and duration risk) ? It’s more likely to be a “ golden moment” to acquire 7-10 year bonds in that regard.

The problem with relying on official National accounts data for evidence of economic slowdown is that this data is a lagging indicator. Central bankers often refer to the problem of using official National accounts data as driving using the rear view mirror. This is why markets latch onto financial indicators with a strong track record as leading indicators of recessions/slowdowns, rather than lagging indicators, like the 10 yr versus 2 yr yield. A good recent example was the 2008/09 GFC, when the bond market started to rally strongly well in advance of the economic data collapsing. I accept that the information content of a flatter yield curve may be different in this cycle  (a point I made in my article) because of the Fed’s holdings of MBS, which reduces the need for active duration risk management of MBS portfolios, and convexity hedging, since the Fed is not a profit-maximising private sector body. However, flatter yield curves have been a feature since the early 2000s, when Chairman Greenspan referred to what he saw as  “ a conundrum” ; the conundrum has become the norm.






The Economist

About Robin Marshall

Robin Marshall is currently a Partner and Fixed Income Strategist, at Smith and Williamson investment Management, London. He also advises the Smith and Williamson Global Inflation Linked Bond Fund. He was formerly Managing Director, Economic and Policy Research, at JPMorgan Chase, London, and Chief Economist, Europe, Africa and Middle East. After graduating from Oxford University, Mr Marshall completed the M.Phil in Economics, in Oxford, and lectured in Economics at the University of London.

Articles by Robin Marshall

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