Inverted Yield curves – a rare but noteworthy indicator

As mentioned in my earlier post today, Global Financial Crisis, QE1, QE2, Inflation, Higher interest rates, Inverted Yield curves, what’s next?  which introduced “What’s next”  as a result of QE1 And QE2 -  the Inverted Yield Curve?

The following are not an exhaust list of countries which displays a ‘flat yield’ or ‘inverted yield’ curve.

Country	Short term	Long Term
Egypt	8.44%	8.27%	June 05th 2001
Portugal	11.01%	9.06%	May 17th 2001
Ireland	12.52%	10.5%	May 17th 2001
Greece	25%	15.58%	May 17th 2001
Brazil	12.57%	12.29%	Live
India	8.22% - 8.34%	8.26%	June 09th 2011
China	3.045% (14 day SHIBOR)	3.09% (5 year swap rates)	Andy Lees of UBS

As interest rate rises (as well as borrowing costs), there will be a time when the short term yield is more attractive than the long term yield. Hence, the curve will be inverted which almost invariably precedes a recession (as profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates).

As Brazil, India and China are in the list above, I am not advising that you look into these equities or Emerging Market or ‘BRIC’ Unit Trust funds. But, in light of the above, I hope that your financial consultant (or yourself) should research more on the above, have a Plan A or Plan B in place, or re adjust your portfolio in anticipation of the above. The probability of the above occurring depends how flat or inverted the curve would be – it is anybody’s guess, but the fact is this is in the light.

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