The spread between the yields on a 10-year US T-note and a 2-year T-note is commonly used
as a harbinger of US recessions. We show that such “long-term spreads” are
statistically dominated in forecasting models by an economically intuitive alternative, a
“near-term forward spread.” This spread can be interpreted as a measure of
market expectations for near-term conventional monetary policy rates. Its predictive power
suggests that when market participants have expected—and priced in—a monetary
policy easing over the subsequent year and a half, a recession was likely to follow. The
near-term spread also has predicted four-quarter GDP growth with greater accuracy than
survey consensus forecasts, and it has substantial predictive power for stock returns.
Once a near-term spread is included in forecasting equations, yields on longer-term bonds
maturing beyond six to eight quarters have no added value for forecasting recessions, GDP
growth, or stock returns.
Read the Complete Article in Financial Analysts Journal
Financial Analysts Journal
CFA Institute Member Content
CFA Institutedoi.org/10.1080/0015198X.2019.1625617ISSN/ISBN: 0015-198X
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