Is it right to use bond yields as a way of informing on future interest rate expectations? My understanding is bond yields are purely down to supply and demand for bond investments, and hence inform on all sorts of other variables in the economy, not least of which is the attractiveness of other alternative investments. Whereas interest rate swap rates do a far better job at informing on where the markets currently see interest rates being in the future. Comparing 6 month Euribor at end of June versus end of September, the 1 year forward rates stretching out 5 or 10 years from now have shifted upwards by around half a percentage point.
My interpretation of the curve is, in essence back in June the market thought interest rates would fall by around 1.5% over the next four years, and now it’s thinking that fall will only be 1% or so.
There is an orthodox theory that says bond yields are just the average of current and future expected short rates. That's what is conventionally taught, anyway. What the yield curve tells you about specific interest rates at specific points in time is not straightforward. (The 5 yr yield is an average of expected rate from today out to five years, etc etc) - you have to do a bit of arithmetic. Swap and other forward (or forward forward rates) rate do yield immediate estimates of expected future rates. But these are determined by bond yields, linked by arbitrage conditions. It's really about observability: they all end up in the same place, but by different routes, one more immediately visible than the other.
Indeed you have to be looking at forward rates not spot rates. Otherwise short term spot movements are distorting the view of the long term view. Expectations of interest rates in 5 years time could be lower than before even though the spot rate has increased. But it’s quite easy to derive a forward curve from a spot curve (which I did for the figures I quoted).
I must be part of a new orthodoxy (or maybe it’s just my profession) where I wouldn’t go to the bond curves for this, but I get your point for many average punters that type of data is more accessible and directionally they should move in similar ways.
The best way to stop Farrage(or Braverman) taking over the Tory Party is to join as a member for £39 and vote in the leadership election for Mordaunt or Tugenhadt. They will let anybody "join" including people outside the UK.
Is it right to use bond yields as a way of informing on future interest rate expectations? My understanding is bond yields are purely down to supply and demand for bond investments, and hence inform on all sorts of other variables in the economy, not least of which is the attractiveness of other alternative investments. Whereas interest rate swap rates do a far better job at informing on where the markets currently see interest rates being in the future. Comparing 6 month Euribor at end of June versus end of September, the 1 year forward rates stretching out 5 or 10 years from now have shifted upwards by around half a percentage point.
My interpretation of the curve is, in essence back in June the market thought interest rates would fall by around 1.5% over the next four years, and now it’s thinking that fall will only be 1% or so.
There is an orthodox theory that says bond yields are just the average of current and future expected short rates. That's what is conventionally taught, anyway. What the yield curve tells you about specific interest rates at specific points in time is not straightforward. (The 5 yr yield is an average of expected rate from today out to five years, etc etc) - you have to do a bit of arithmetic. Swap and other forward (or forward forward rates) rate do yield immediate estimates of expected future rates. But these are determined by bond yields, linked by arbitrage conditions. It's really about observability: they all end up in the same place, but by different routes, one more immediately visible than the other.
Indeed you have to be looking at forward rates not spot rates. Otherwise short term spot movements are distorting the view of the long term view. Expectations of interest rates in 5 years time could be lower than before even though the spot rate has increased. But it’s quite easy to derive a forward curve from a spot curve (which I did for the figures I quoted).
I must be part of a new orthodoxy (or maybe it’s just my profession) where I wouldn’t go to the bond curves for this, but I get your point for many average punters that type of data is more accessible and directionally they should move in similar ways.
The best way to stop Farrage(or Braverman) taking over the Tory Party is to join as a member for £39 and vote in the leadership election for Mordaunt or Tugenhadt. They will let anybody "join" including people outside the UK.