Ertragskurve
Submitted by Atlas Indicators Investment Advisors on February 14th, 2019
In one of last week’s notes (click here to review), we brought you up to date on America’s trade (im)balance. In the note, we explained that the deficit fell but did so because America’s exports slowed less than our imports. We looked at it as a sign of global slowing. Today we’ll explore another sign of global slowing. The German yield curve.
First, let's review the yield curve concept. Simply put, it is a graph showing the relationship between interest rates and time. The vertical axis represents yield while the horizontal axis is the length of time before a bond’s maturity. Generally speaking, when these two variables are plotted on the graph, rates are higher the further out their maturities are from today, forming an upward sloping line from the lower left toward the upper right-hand side. Check out the stylized illustrations above created by J R.
For years, the yield curve in Germany has included somewhat shorter segments which were negative (depositors were literally paying their bank to keep money in a savings account). While many German rates remained negative last September, the curve’s shape was still upward sloping (i.e., a four-year bond would cost you less to buy than one of a shorter maturity). That all began changing when markets around the globe were hit with a new bout of volatility starting in the late fall of last year, causing parts of the German yield curve to invert. Investors were still losing money, but for instance, they lost less on a four-year bond than a one-year note.
Even as stock indices here in the U.S. have begun behaving more orderly lately, the inverted nature of Germany’s curve has not reversed. As of this writing, owning short-term debt (e.g., maturing between now and April of next year) costs more than one with a longer expiration.
The global economy is probably waning. We saw it in the trade data and are seeing signs of it in Germany's yield curve. China is showing signs of stalling as well (read our note on it here). Along with America, these are significant economies and their progress will greatly influence the growth patterns of the world. As of yet, Atlas does not see this trend as a harbinger of recession; rather, it suggests to us a more typical cyclical slowdown. We’ll keep an eye on them all and give you our take as things change in material ways.