Report
Uncertainty about future inflation and uncertainty about central banks’ reaction to inflation: Two very different effects on the term premium (the yield curve slope)
In OECD countries (we look at the United States and the euro zone), financial markets currently face two uncertainties: Uncertainty about future inflation; Uncertainty about central banks’ reaction to inflation. We show that: Uncertainty about future inflation increases the term premium and the slope of the yield curve (the higher the uncertainty about future inflation, the riskier it is to hold a nominal bond); Uncertainty about the central bank’s reaction to inflation reduces the term premium and the slope of the yield curve (the higher the uncertainty about the central bank’s reaction, the higher the risk associated with holding a series of short-term investments relative to the risk of holding a bond). If yield curves remain flat today, it may therefore be because the uncertainty about central banks’ reaction is outweigh ing the uncertainty about inflation.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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