Analysts warned to be wary of the yield-curve
Market participants that use short-term movements in the yield curve as signals of future economic development could be mistaken in their analysis, according to a recent report published by the Federal Reserve Bank of New York.
Kambhu and Mosser argue that such “feedback” effects can alter the shape of the curve, and warned against making assumptions based on a short-term change in the yield curve. The report, “The Effect of Interest Rate Options Hedging on Term-Structure Dynamics”, stated: “The times when market participants and policymakers are most interested in extracting from the yield curve a signal about economic fundamentals are precisely the times when changes in the curve may be distorted by liquidity effects.”
The report concluded that analysts should caution against interpreting short-run movements in the yield curve as signals of future economic development.
A copy of the full report is available at www.newyorkfed.org
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