Hi guys,
Observation 3 The current yield curve for Country Y suggests that the business cycle is in the slowdown phase, with bond yields starting to reflect contractionary conditions.
Based on Observation 3, Wakuluk most likely expects Country Y’s yield curve in the near term to: A invert. B flatten. C steepen.
C is correct.
Why so? I would have went for INVERT…
Thanks!!
Due to the slowdown, the Central Bank will start easing interest rates for firms to borrow and invest and for people to consume which will propel growth. This will lead to higher inflation in the future and will gradually lead to rate hikes, steepening the yield curve in the long run.
I think the focus is this question saying bonds are starting to reflect contractionary conditions. As more risk is priced in and investors flock from bonds into “risk free” assets bonds yields will rise while the central bank chops ST rates. Interested to hear others opinions on this.
The key word is expect. Currently is inverted but will steepen