ECB-PUBLIC Benoît Cœuré Member of the Executive Board European Central Bank What yield curves are telling us Dublin, 31 January 2018
US Rubric Treasury curve flattest in ten years Bund and US Treasury slope of the yield curve (basis points) 350 DE vs US slope spread 10Y vs 2Y Bund 10Y vs 2Y UST 300 250 200 150 100 50 0-50 -100-150 -200 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sources: Bloomberg and ECB staff calculations. Notes: Last observation refers to 29 January 2018. 1
A Rubric fall in the term premium is weighing on long-term yields 10-year US Treasury yield decomposition (percentage points) 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6 Fitted yield Term premium Risk-neutral yield -0.8 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Sources: Federal Reserve Bank of New York and ECB staff calculations. Notes: The term premium estimates are obtained from a five-factor, no-arbitrage term structure model of Adrian, Crump and Mönch (2013). Last observation is for 26 January 2018. 2
APP Rubric likely to have triggered large net capital outflows Breakdown of euro area net portfolio investment flows (EUR bn; twelve-month moving sums) Total Equities Long-term debt securities Short-term debt securities 800 APP 600 400 200 0-200 -400 2010 2011 2012 2013 2014 2015 2016 2017 Source: Haver Analytics and ECB staff calculations. Notes: A positive (negative) number indicates net outflows (inflows) from (into) the euro area. Equity includes investment fund shares. APP stands for Asset Purchase Programme. The latest observation is for November 2017. 3
Euro Rubric area investors have become large buyers of US debt securities Foreign net purchases of US portfolio debt securities (USD bn; four-quarter moving sums) 1200 Total Euro area Rest of the world 1000 800 600 400 200 0-200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Haver Analytics and ECB staff calculations. Notes: A positive (negative) number indicates net purchases (sales) of US debt securities by foreign investors. The latest observation is for the third quarter of 2017. 4
Differences Rubric in bond returns can cause cross-border capital flows 10-year FX hedged sovereign yield for US and DE and equivalent Japanese government bond yield (percent) 10-year FX hedged DE sovereign yield 10-year FX hedged US sovereign yield 10-year JGB yield 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Bloomberg and ECB staff calculations. Notes: Yields on US Treasuries and Bunds assumed to be hedged against movements in Japanese Yen. Hedging costs are computed as annualized three months costs. Last observation refers to 30 January 2018. 5
Spillovers Rubric from the euro area to the US increased around the APP Spillovers between US Treasury and Bund yields (in percent of error variance) 70 Spilovers from DE Bunds to US Treasuries Spilovers from US Treasuries to DE Bunds 60 50 40 30 20 10 0 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Bloomberg and ECB staff calculations. Notes: Spillover estimates are derived from the Diebold/Yilmaz (2014) methodology. Contributions are calculated from the forecast error variance matrix inferred from generalised identification of shocks. For example, spillovers from US Treasuries to Bunds are measured as the share of the Bund error variance explained by movements in US Treasuries. Last observation is for 26 January 2018. 6
Foreign Rubric official institutions currently net sellers of US government securities 800 Foreign purchases of US Treasuries and government agency bonds (USD bn; 12-month moving sum) private public 600 400 200 0-200 -400-600 2003 2005 2007 2009 2011 2013 2015 2017 Source: US TICS and ECB staff calculations. Notes: Last observation is for November 2017. 7
Inflation Rubric risk premia in the US and the euro area close to record lows 5-10 year decomposition of breakeven inflation rates for US (percent) 5-10 year ahead breakeven inflation Inflation risk premium Expected inflation 5-10 year decomposition of breakeven inflation rates for the euro area (percent) 5-10 year ahead breakeven inflation Inflation risk premium Expected inflation 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 2005 2007 2009 2011 2013 2015 2017 Source: Federal Reserve Bank of New York. Notes: Abrahams-Adrian-Crump-Mönch decomposition. Last observation refers to December 2017. 8 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 2005 2007 2009 2011 2013 2015 2017 Source: Thomson Reuters and ECB staff calculations. Notes: The decomposition is based on an affine term structure model and fitted to the euro area zero-coupon inflation linked swap curve. The estimation method follows Joslin, Singleton and Zhu (2011). For details please see Camba-Mendez, G. and T. Werner (2017). Last observation is for December 2017.
Investors Rubric appear less uncertain over future inflation Risk-neutral probability density function of euro area inflation over the next five years 29-Jan-18 22-Jan-15-3.0-2.5-2.0-1.5-1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Sources: Bloomberg, Reuters, and ECB calculations. Note: Density functions are computed from 5-year maturity zero-coupon inflation option floors under the assumption of risk neutrality. These risk neutral density functions may differ significantly from physical (or "true") probability distributions. 9
Low Rubric volatility and term premia may have common underlying fundamental US bond term premium and implied rates volatility bps 150 5y5y OIS USD Swaption Nvol* (lhs) 10-year US Treasury term premia (rhs) 3.75 % 140 3.20 130 2.65 120 2.10 110 1.55 100 1.00 90 0.45 80-0.10 70-0.65 60-1.20 2006 2008 2010 2012 2014 2016 2018 Source: Bloomberg and ECB staff calculations. Notes: Expected volatility priced in the US swaption market (normal model). Last observation refers to 29 January 2018. 10