Central Banks Are Almost Done (For Now) 'Real' Yield-Curve Shows

The global real-yield curve inversion suggests that central banks are nearing the end of their tightening cycles, providing a favorable position for risk assets. However, if inflation accelerates, it could pose a risk, forcing central banks back into action.

Historically, the inversion of the nominal-yield curve has indicated a downturn, but it doesn’t provide precise timing for risk management. The real-yield curve, which has recently re-inverted, offers more insights in an inflationary environment, signaling that central banks have elevated short-term real rates above long-term rates.

Despite the decrease in global inflation and the slower pace of rate hikes by central banks, real conditions are still tightening swiftly. This isn’t affecting the risk rally currently, as the flattening real-yield curve is increasing excess liquidity due to a weaker dollar.

However, a resurgence of inflation, potentially driven by stimuli in China and a budding rally in oil, could diminish excess liquidity and raise rates further, leaving equities vulnerable.