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ABSTRACT
This article explores the wide-ranging influence of the yield curve – a diagrammatic device for representing the term structure of effective interest rates on market-traded debt instruments – in contemporary monetary, financial and economic life. Drawing on the expanding literature on financial performativity, including within the field of cultural economy, the article submits that by virtue of its centrality to multiple, closely interconnected and often highly recursive sets of relations between economies, financial markets and central banks, the yield curve is performative at a range of different levels; and, parsing various different extant understandings of performativity, the article theorizes the particular nature of such performativity in the yield curve context. Against the grain of the bulk of the literature on financial performativity, however, the article also endeavors to connect the yield curve’s performativity explicitly to questions of privilege (the privileges of representation) and power (the power to perform) and their unequal distribution. That is to say, the article argues that to understand the multidimensional performativity of the yield curve, we need to draw out its political as well as cultural economy.
Acknowledgements
I have had lots of help in researching and writing this article. Thanks to Benjamin Braun, Daniel Davies, Daniela Gabor, Paul Langley, Andrew Leyshon, Kate Zaloom and the anonymous referees for reading and commenting incisively on earlier drafts and for pointing me in the direction of important materials I had missed. The usual disclaimers apply.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. The Conference Board is an international business membership and research organization that publishes a long-established and widely used clutch of economic and financial indicators.
3. https://www.newyorkfed.org/research/capital_markets/ycfaq.html (retrieved April 2016).
4. This involves buying a long-dated form of an asset with an upwards-sloping curve and then selling (pre-maturity) what is by now a shorter-dated form of the same asset, thus generating a gross profit if the curve has not moved because a shorter maturity entails a lower yield and a higher price.
5. See, for example, http://www.bankofengland.co.uk/statistics/Documents/yieldcurve/yields_background_note.pdf.
6. Whether this is always true, including in cases when monetary policymakers claim it is, is not clear. Central bankers clearly care about other outcomes of their policies, too (e.g. King Citation1997). But since controlling inflation is typically the primary objective with which they are officially tasked, they say that they are single-minded in their focus on inflation precisely to ensure that their commitment to this primary objective remains credible (Braun Citation2015, pp. 381–382). As a simple analogy, if you ask me to clean your car, you will likely be less convinced about my commitment to the cause if I claim I will also be cleaning five others.
7. Two points are important here. Firstly, not all central banks base their inflation projections on the yield curve. Others currently using this method include the Bank of Japan and, since 2006, the European Central Bank. The two other main approaches are to use the bank’s own interest rate forecasts (e.g. the Fed and, since 2006, the Swedish Riksbank) or to assume that prevailing market rates will remain unchanged (e.g. the European Central Bank and Riksbank up to 2006) (Braun Citation2015, p. 376). Secondly, and relatedly, there are good reasons to question basing inflation projections on the yield curve, not least the fact that the implied forward rates contained in the curve generally ‘bear little resemblance to what future interest rates actually turn out to be’ (Blinder Citation2004, p. 77).
8. For example: ‘In May 2009, after the first slug of [quantitative easing], the Inflation Report forecast was well below target. This suggested that, unless the economy improved much faster than it expected, the Committee believed that monetary conditions would need to be looser than implied by the yield curve at the time. As things turned out, that’s exactly what happened.’
9. Equally, in forecasting inflation, central banks are, as Holmes (Citation2014, p. 24) observes, projecting a phenomenon over which they explicitly seek to exercise control.
13. This clearly is, and is recognized by central banks as, a risk. In March 2016, for instance, the Fed sent a ‘dovish signal’ about future rate paths to the markets but by May market conditions had changed and Fed officials were feeling ‘constrained by investor sentiment’ (which their own communications had helped shape) (LSR Citation2016, p. 1). The Fed now revised its guidance and investors cried foul, objecting ‘to being manipulated in this way’ and accusing the Fed of, no less, ‘failing to communicate properly’ (LSR Citation2016).
14. The fact that movements in this ‘world’ rate are dominated by movements in US government debt yields leads some observers (e.g. Bernanke Citation2007) to suggest that the Fed retains significant leverage over longer term US rates, but others insist that ‘even US yields are partly driven by foreign forces’ (Hördahl et al. Citation2016, p. 3).
17. Over the past three decades, various developments have led commentators periodically to speculate that the yield curve may finally have ‘lost’ its predictive power. Such doubts are in the air today, too, with the Financial Times reporting in May 2016 that ‘economic researchers are mixed on whether a prolonged period of low interest rates has impaired the yield curve’s power as a recession harbinger’ (Samson Citation2016). Time will tell whether, on this occasion, the skeptics are right.
19. Although the empirical literature offers mixed evidence regarding the extent of the effect of rate changes on business investment (Caballero Citation1999).
20. Although, again, some scholars (e.g. Sharpe & Suarez Citation2014) argue that investment plans are less sensitive to potential changes in borrowing costs than has traditionally been thought.
21. And not just the yield curve: see Mann (n.d.) on the world traced/performed by the Phillips curve.
22. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/yieldmethod.aspx.
23. Although interest-rate swaps have been sold as hedging products to small numbers of retail investors, most notably in Denmark and the UK. In fact, in the UK, they have, like many other financial products, been mis-sold; see http://www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products.