Consider the Yield Curve

One of my favourite tools is that of the Yield Curve, in the US they look at the Treasury Curve and the TED (Treasury/EuroDollar), in Ireland we use the Euribor, and what the curve tells us is the interbank cost of borrowing money, or I should say that is what it represents because it can actually tell so much more. It is a market mechanism that gives an indication of what the belief is in the market towards inflation, interest rates and cost of funding, this isn’t opinion, it is derived from real money flowing around the world and that is why I like it, the Yield Curve doesn’t lie.

So we’ll take a look at what has been happening in the last month.

We see something interesting here, the short term expectation is that rates will remain low, in fact, with deflation still a fear the short-term working money (banks generally run off the 3 month) is getting cheaper of late. The divergence occurs after the 12 month mark, so essentially in …

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Drop in Fixed Mortgage Rates likely

In watching the movements of the Euribor Yield Curve we saw that margins were likely to increase on fixed rates, however, over the month of April we are seeing the yield curve drop below levels seen at the start of the month and that will likely result in a repricing of debt.

What we are seeing is the increasingly bearing outlook feeding through to interbank rates with the expectation of the May cut showing a strong likelyhood of going too 1%, that is why the 1 month money has actually dropped below that mark when earlier in the month it was slightly above it.

The yield curve is generally feeding the market information about inflation and it would appear that after the May rate decrease that the medium term outlook is depressed. The lines hold a tight margin until the two year mark at which point the earlier curve trends higher and today’s keeps that c.20bip difference. Fixed rates don’t always change with rate drops because they are priced off of …

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