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
The week on Risk.net, July 7-13, 2018Receive this by email