Yield Curves

A yield curve is a line that plots interest rates, at a point in time, for various maturity dates into the future. It is common to have yield curves plotting maturities from 3 months to 30 years. A yield curve is not a prediction of future rates but, at the point of drawing, the curve represents all that is known about future interest rates. The representation in the graph below is termed a positive yield curve. This is the shape we would expect the graph to be – the longer you borrow money the higher the rate – the longer you leave money on deposit the higher the return you expect.


The Y axis denotes the interest rate from zero to infinity and the X axis depicts time from 1 day to infinity.

But the yield curve today is not only inverted, which is itself counter-intuitive, but it falls outside the standard x-y axis into negative territory, which is utterly nonsensical. Commentators over the years have found solace in the fact that yield curves tend to forewarn of trouble ahead – after that they tend to flatten – and then they return to the more reasonable positive curve above.

But this time it’s different. Few people outside of Central Bank circles can make any sense of this. Governments and large corporations are now in a position to borrow long-term money at a minus interest rate – meaning that the investors lending the money, in the first instance, are guaranteed to receive less money back. The investors on the other side of this deal are invariably pension funds and insurance companies. It is obvious that adopting this business model for any length of time will end in total ruin.

At retail consumer level this development is also very worrying. Depositors and savers are suffering hugely as returns plummet lower and lower. There is a consensus among most analysts that banks cannot afford to drop consumer deposit rates below zero. MMPI disagrees. Banks have already seen other interest-rate-related instruments fall into negative territory. Even the safe-haven ECB deposit rate for banks has fallen to -0.40%. So unless banks can lend their deposits as loans they will be faced with a business model that accepts consumer deposits at a rate above zero and offloads the funds with the ECB at -0.40%; another calamitous situation that will also end in ruin.

In an attempt to offset the negativity for consumers MMPI has developed its Escalator Series of investments that attempts to outperform deposit rates. There are no guarantees that outperformance will be achieved in every case – although MMPI has a very good track record. Also it is certain that not all consumers will have the appetite to assume the higher level of risk attaching to MMPI’s products

However, with deposit rates already at zero (and heading lower) consumers will be forced to seek alternative returns.

MMPI’s latest investment products the Escalator Plan Series 33 and 34 may well be worth considering. However, prior to making an investment in either MMPI Escalator Plan please read the product brochures, which include appropriate warnings and highlight the investment risks.