Months of consistently raising interest rates have pushed the Brazilian and Indian government bond markets into an inverted yield curve. In an inverted yield curve, interest rates on short term government issues move higher than longer term rates and is considered a warning sign of trouble. The most stark example of this can be seen in Greece where yields on the 2 year government bond are now hovering around the 30% mark.
There are differences however. Brazilian and Indian financial authorities have been engaged in an extremely aggressive battle against inflation. Unlike the USA and continental Europe, food and fuel make up a large percentage of the core inflation component. But there is a cost to such policy. Satisfying the legions of poor and hungry comes at the price of reducing discretionary consumer spending and domestic business spending.
The Bottom Line: Aggressive action by Indian and Brazilian authorities to battle inflation have resulted in an inverse yield curve in their bond markets. This may be a warning sign of capital market implosion or more benignly (and likely), that growth may be slowing.
Friday, June 17, 2011
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