Recent market news has caused great uncertainty, as the Federal Reserve has announced it will hold steady with rates. These signs of an upcoming top in rates are a concern for issuers, investors, and traders, as higher rates can have detrimental effects on investment portfolios and borrowing costs.
As a result of the constant flux in this sector, it is important to be aware of indicators that a top in rates is on the horizon. Decreased volatility along with flattening yield curves could be indicative of an unsustainable growth phase reaching a peak.
In addition, a wide gap between short and long-term rates is a potential red flag, as smaller spreads typically mean the lending environment is unhealthy and there is a lack of demand for long-term loans. That being said, if the yield curves inverts, it could be a major indicator of an impending recession, which can also lead to a top in rates.
The yield on the 10-year treasury is also a key figure to watch. This figure plummeted at the start of 2019 in response to the Fed signaling that no change in policy was to be expected. If they backtrack on this and move to more accommodative policy, it could lead to a top in rates. Symptoms of inflation, such as increasing unemployment or commodity prices, should also be watched closely as these could lead to a rapid tightening of policy and force the Fed’s hand to raise the cost of borrowing.
Overall, investors, issuers, and traders all have to stay vigilant in the current market environment with regards to signs of an impending top in rates. If any of the indicators mentioned above are observed, appropriate measures should be taken to mitigate against a potential bubble bursting.
