Ukraine’s Inverted Yield Curve
beyondbrics today had a post entitled, “Ukraine bonds: inverted yield curve failing to capture risk?”, in which they suggest that investors may be underpricing the risk a short-term Ukrainian default carries for its longer term liabilities. If you find beyondbrics’ expectations regarding the behavior of the IMF to be plausible (as, absent information to the contrary, I do), then it seems like a pretty decent argument.
But what’s possibly more interesting, at least from a metaphysical perspective (probably Ukraine’s version of Bill Gross doesn’t care much about this), is everything that’s embedded in the post’s first sentence:
As anyone who follows Ukrainian government international bonds will know, the country’s yield curve has a tendency to invert. When this happens, it suggests that while investors think things will probably be all right in the long run, they see a big risk of something going wrong in the near future.
At some point, the long run becomes your near future. And if there’s a tendency for things to blow up in the near future, that means, at some point, there was also a long run in which that blow up was a possibility. If you’re an investor, don’t you eventually lose faith in Ukraine’s ability to “sort it out in the long run”? According to the yield curve in the post, the bonds maturing in 2017 yield 10%, and the ones in 2015 12%. But the country’s a catastrophe now, and there’s an election in 2015 that could throw the country into additional spasms of political and/or economic confrontation. It’s not that long before all of a sudden those maturities become the operative short term, and after the country’s performance the last three weeks, do you really want to bet on it being clean sailing by then?