Wednesday, August 23, 2017

The Famous Spread Between 10 Year and 2 Year Treasuries

Here is a widely discussed economic indicator that when you think about it, is actually quite boring

The famous spread between the
10 Year Treasury, and 2 Year Treasury Note is hailed as one of the most accurate predictors of a looming recession.  As you can see from recent history the spread normally trends down into negative territory just before a recession hits as defined by a drop in GDP. How well the indicator will continue to predict future recessions is another question.

With all the hoopla surrounding Jackson Hole this week as Central Bankers from around the world meet to discuss policy many eyes will be on the bond market’s reaction.  Considering the current trend in rates I’d say policy makers have their jobs cut out for them.  The spread is currently sitting at 0.86 , which is down significantly from it’s high of 2.66 reached in December 2013.

The spread is tightening as the Fed continues to raise rates pushing up near term debt yields. However the yield on 10 Year Treasury Bond's has actually been dropping recently.  How the remainder of this plays out will be something for history books.

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