Bank of America's investment arm has offered some soothing words to investors fretting about an imminent meltdown in global equities and a resulting slowdown.
The investment community have been busy watching the recent trend in bond yields this year, with many commentators predicting that the current economic cycle could be reaching a peak. The "flattening of the yield curve" — where short-term interest rates get closer to the long-term rates — has sparked some fears that a recession is around the corner. In a normal functioning economy, short-term lending has fewer risks — the underlying thought is that you can more easily predict what's happening tomorrow rather next month.
Prior to previous recessions, the gap between these two rates has narrowed, thus every time the two get closer some investors prepare for the worst. But, according to Bank of America Merrill Lynch, we are not there yet.
"The yield curve may be flattening but our rates strategists do not expect it to invert in 2018," the research note Tuesday said.
An "inversion" of the yield curve takes place when lending in the short-term is perceived as more risky than lending in the long term. This means that investors believe the economy is doing much worse in the present than it will do in the future, i.e. we are in the middle of an economic slowdown.