‘Steepening of the yield curve’ is something that has dominated the wires over the last few days. In simple words, it represents the rise in the long duration government bond yields and a drop in the short duration government bond yields.
The ‘yield curve’ has broad implications on the financial markets. Marc Ostwald, strategist ad ADM Investor Services International explains that the recent steepening of the yield curve seen across the advanced world has been led by Japan.
There is a speculation that BOJ would trim purchases of long duration bonds and increase short duration bonds. This is leading to the steepening of the yield curve in Japan and across the advanced world, says Ostwald.
Steepening of the yield curve could hurt equity markets, says Ostwald, but adds that banking shares could benefit as they lend long and borrow short.
Ostwald believes BOJ is a bigger event compared to next week’s FOMC rate decision as almost no one in the market sees Fed moving rates any time soon.