Interest rates at different maturities make it possible to “read” the expectations of market participants on inflation, growth and monetary policy.
Since 2022, the very strong rise in inflation then its decline will have been one of the main determinants of interest rates. The ongoing “steepening” of the yield curve today mainly shows that market participants are reassured that price increases are under control. In Switzerland too, changes in rates over different maturities illustrate expectations of a continued reduction in the key rate of the Swiss National Bank (SNB) and continued prospects of favorable activity for the coming quarters.
The yield curve, an almost infallible indicator until 2022
The gap between long rates and short rates is a signal followed by many forecasters to predict the phases of the economic cycle. It is even one of the components of the leading cycle indicator published by the American Conference Board. Its predictive power has proven almost infallible in forecasting the recessions of recent decades. Until 2022, whenever long rates were lower than short rates – either a so-called “negative” or “inverted” yield curve – a recession occurred within 6 to 12 months. This predictive power is explained by the fact that interest rates integrate market expectations both regarding growth and inflation, but especially regarding monetary policies. Thus, during periods of economic slowdown, markets anticipate key rate cuts before they occur, which implies lower long-term rates than short-term rates.
In 2022, and until recently, the interest rate curve clearly inverted, sending for several quarters the signal of an imminent recession which ultimately did not occur. Since the start of this atypical post-Covid cycle, the main factor affecting interest rates could well be inflation. Indeed, its surge to levels not observed for 40 years has blurred the signal from the yield curve. The inversion of the yield curve firstly reflected the very clear monetary tightening necessary to deal with the surge in prices. And recently, the rise (or “re-steepening”) of the yield curve can be explained by the anticipation of a possible loosening of monetary policies, made possible by controlled inflation.
A current yield curve that reflects market confidence in disinflation
Since the beginning of September in the United States (and more recently in Europe), yield curves have in fact returned to positive territory. However, this development coincided with the appearance of numerous signals of economic weakness (particularly in Europe). However, we should not ignore the yield curve, nor consider this rebound as another false signal, but rather as the continuation of this atypical cycle, with a cycle of marked cuts in central bank rates to come. Indeed, during a phase of monetary easing, short-term rates fall more quickly than long-term rates. Thus, the recent steepening of the interest rate curve above all confirms the confidence of market participants in the easing of inflation.
In Switzerland, the situation is a little different. Indeed, the yield curve has not inverted, as was the case in the United States or in the main European markets. The rise in inflation in 2022 remained more moderate in Switzerland and was accompanied by a flattening of the yield curve, i.e. the rates of different maturities have almost aligned. In a context of easing inflation and continued appreciation of the Swiss franc, the SNB was one of the first to lower its key rate and is expected to continue the movement in the months to come. The Swiss yield curve has recently “re-steeped”, with long rates once again higher than short rates. This repentance illustrates the anticipation by market participants of the continuation of the easing of the SNB’s key rate as well as the maintenance of positive growth prospects for the Swiss economy over the coming quarters.
Related News :