Derivatives Markets: Inversion means trouble in US structured notes
The very unusual phenomenon of curve inversion has made a return to the US dollar swap market, and its re-appearance is causing quite a stir.
|A version of this article first appeared in Total Derivatives.
Total Derivatives is the prime source of real-time news and analysis of the global fixed income derivatives markets.
Authors: Vincenzo.Pelosi@TotalDerivatives.com and Ronan.ONeill@TotalDerivatives.com It is not something that happens very often. In fact, on average, it has occurred less than one day per year over the last 15 years. But when it does happen – as it has since mid November – it tends to raise eyebrows in the fixed income derivatives markets, and raise the anxiety levels of investors in structured products.
Treasury yield curve gets familiar with inversion
Historically, the US Treasury yield curve has, in general, assumed a positive shape. This is the result of the “term premium” – the fact that investors demand a higher yield for longer-dated bonds because of the higher risk that inflation may erode the value of their returns over the longer holding period.
The Treasury curve sometimes inverts, however. Indeed the spread between the 2y and 10y Treasury yields – the 2s/10s Treasury curve – has been below zero for much of 2006.