Investment Newsletter April 2018
Winds of Change: Signals in the Bond Market Windmills were a very important development in the history of the Netherlands to drain the land and process the crops. But the windmill, and in particular the sails, had another very useful purpose. They sent messages.
Neal Foundly Investment Analyst
Equilibrium Investment Management
By positioning the sails at various angles, millers could quickly send messages across long distances. There were standard settings to announce events such as celebrations or deaths but in World War II they were used to send messages to the Resistance. For example, when British and American pilots were shot down over the Netherlands, local millers signaled the airmen’s location which allowed many to be successfully rescued.
The Answer is Blowing in the Wind The signal can often be as important as the source and this is very much the case in markets. Like the windmill, this is incredibly important for the (now global) economy but the market also sends signals which are important to stand back and read. In a steadily growing economy, the interest rates on loans (or yields on bonds) will be lower for shorter periods. In theory, the longer the period the greater the risk of default or inflation (the enemy of bonds is inflation which eats away the value of the fixed income). Thus, the ‘yield curve’ as it is known, is normally upward sloping as shown on the left of Graph 1 (over the page).
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