Perspectives on the yield curve
The yield curve, the difference between long and short-dated yields on government bonds is usually positive. With the US yield curve flattening, the prospect of an inversion – which in turn has been a reliable indicator of recession – has increased. A focus on some of the detail here, however, means we are not unduly concerned. The role of banks and their willingness/ability to lend is an important consideration. In a typical recessionary environment, margin compression results in banks cutting back lending. Currently, however, margins have been increasing which with banks being well capitalised, provides a significant positive going forward.
The investment environment also provides reassurance. Rather than being in a typical cycle characterised by overinvestment, squeezed margins and subsequent retrenchment in hiring and investment activity, we stand at a juncture in which investment levels remain relatively low. This supports our view that the cycle still has some way to run.