Yield Curve Flattening a Symptom of Ineffective Policy Tightening

Xing, Victor (2018): Yield Curve Flattening a Symptom of Ineffective Policy Tightening.

Abstract

Executive summary: • A flattening yield curve highlights Federal Reserve rate hikes’ inability to tighten financial conditions, as low long-term interest rates continued to induce institutional investors to “reach for yield” by moving up the risk ladder • Central banks initiating “short volatility positions” via QE have dampened long-term sovereign bond yields, which crowded out private capital and induced investors to “find something else to do” by buying more esoteric assets • A flat yield curve alone would only pave the way, rather than directly trigger events that result in recession, as persistently low long-term bond yields increase the probability and magnify the impacts of balance sheet crises • Prolonged easy financial conditions as a result of ineffective tightening is not costless, for uneven wage growth and rapid asset price appreciation have exacerbated inequality to heighten financial, social and political instability

• Item Type: MPRA Paper
• Language: English
• Keywords: Yield curve, monetary policy, balance sheet normalization, quantitative easing
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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