Each Wednesday, Bespoke publishes our Fixed Income Weekly, a seven page recap of what’s happening in the world of rates, credit, and foreign exchange. In addition to novel analysis, a trade idea, charts, and commentary on individual markets, we update subscribers on our Bespoke Global Yield Curve, a GDP-weighted index of the 15 largest economies’ local currency bond yields. Below, we show the current status of the Bespoke Global Yield Curve for each maturity we calculate, as well as the curve’s position as-of three months ago (all values are basis points).
Over the past three months, front-end rates have risen on a GDP-weighted basis for the largest global economies. Mid-curve rates have been basically unchanged, while the long end from 10 years out has seen yields decline.
We also chart the current level of key maturities since inception, expressed in basis points. Global yields declined sharply across the curve between late 2014 and mid-2016. Since then, shorter-term yields have trended up (thanks in part to Fed hikes, but also borrowing from tighter monetary conditions in China, a less dovish ECB, and rate hikes in countries like Mexico), and done so fairly consistently. But longer-term yields are well off their highs from the first quarter. Sluggish oil prices tamping down inflation risk, lower term premiums thanks in part to fewer upside surprises in economic data, and less risk-seeking behavior across financial markets are all factors in the outperformance (yields moving inverse to prices) of longer-term securities on a global basis.
Finally, each week we update time series charts of the curvature of our global bond market snapshot. Below we chart the spread between 2 and 10-year yields on the curve (shown in basis points). On a global basis, 2s10s has been flattening quite consistently since mid-2014 when our series starts. Low readings came during growth misses around the world in Q1 2015 and the summer of 2016, with the Brexit vote, recovery in oil prices, and US election serving as temporary steepening catalysts in late 2016 and early 2017. For 5s30s, it’s a broadly similar story, though the curve has flattened less and behaved slightly differently in certain flattening/steepening regimes.
We like the Bespoke Global Yield Curve because it provides a more holistic view of bond markets around the world than a single country’s bond market does. Extreme flattening or steepening in a given country may be driven by idiosyncratic factors that don’t say much about the total global market for fixed income. Changes in the shape and level of the curve are instructive for understanding the current trends in the global economy, as the descriptions above help to illustrate.