Discourses of Inverted Yield Curve and the Reaction on US Stock Markets

M Akhsanur Rofi

doi:10.34149/jmbr.v18i2.278

Abstract

An outlook model to predict future economic growth is crucially important for government, financial institution, corporate, investor, as well as household. An inverted yield curve has been trusted for long time as a prediction for economic recession. But current development showed that there is change in IYC pattern that might be because of the new normal of market condition, anxious investor, or something else, hence it created the discourse among market stakeholder whether it remain a reliable prediction model or not. The research will focus on discourse among important economic stakeholders in US market and how they might impact on stock market rationally or irrationally using discourses network analysis, graph analysis, and t-Test analysis. The result confirmed that there is a different pattern on IYC, also there is a short-term correlation between IYC and stock price movement, confirmed the information theory.

Highlights

In macroeconomics, the term spread which is the difference between long-term & short-term interest rate – could occurred between rate in the money market and the rate in the debt market – is an important relationship to predict future economic activity (Madura, 2017)
The short-term rate even higher if the market liquidity shifted from money market to capital market, as it less profitable to borrow in short- term and lend in long-term, reduce loan supply and tighten credit condition
The research focusses on this paper is to examine the discourses of important economic stakeholders during the arising of inverted yield curve in the United States especially in the event of US bond market in the last two years that might generate substantial information of market behavior and create significant movement in several US major markets

Summary

INTRODUCTION

The term spread which is the difference between long-term & short-term interest rate – could occurred between rate in the money market and the rate in the debt market – is an important relationship to predict future economic activity (Madura, 2017). A possible explanation according to business cycle concept is the central bank will gradually raise short term interest rate during an economic expansion, but long-term rate will remain high The latter rate will be lowered if investor becomes more pessimistic shape a flatter yield curve in the bond market. The discourse is increasing to a divided debate whether an inverted yield curve is an early warning of bad economic outlook or rather just the new normal It is having a big impact on investor expectation as it creates uncertainty, market turmoil, and panic over the short-term and longterm. Some investors would take a short-term profit while some others rather be careful to maintain their asset allocation Such capital gain might be acquired in the longer-term bonds with highest credit quality should price of riskier assets and short-term bond yield both fall as a recession unfold and stock market volatility increases (Fidelity, 2019). H2: There is a mean difference in stock price change between before and after IYC showed

Test Data Normality Test

Curve at Google Search

Findings

Financial Services