From Across the Curve:
Ed Yardeni has been around for a long time(for that matter so have
I). I think that he is the fellow who coined the term “bond vigilantes”
in the 1980s. Back in the day he was the chief economist at the
venerable investment bank EFHutton (defunct). He has digitally penned an
interesting piece on the message conveyed by the flattening of the 2s
1os spread in Treasury space.
Via Dr. Ed Yardeni and a tip of the hat to Steve Feiss at Government Perspectives:
Saturday, May 28, 2016
US Yield Curve: Global Yellow Light?
The spread between the 10-year US Treasury bond yield and the federal
funds rate is one of the 10 components of the Index of Leading Economic
Indicators compiled monthly by the Conference Board. There is no trend
in this series, which tends to cycle around zero. It is widely deemed to
be one of the more accurate business-cycle indicators, predicting
economic growth when it is positive and a recession when it is negative.
The spread does tend to lead the y/y growth cycle in the Index of
Coincident Economic Indicators.
Of course, the spread is also available on a daily basis. A more
sensitive version of this leading indicator is the spread between the
10-year Treasury yield and the 2-year Treasury yield. That’s because the
latter tends to anticipate moves in the federal funds rate, which is
managed by the Fed. Currently, the spread is still positive but
narrowing. It was 96bps on Friday, May 20, down from the most recent
cyclical high of 266bps during December 31, 2013.
Interestingly, the spread has been narrowing as the Fed has been
moving toward normalizing monetary policy. When QE was terminated at the
end of October 2014, the spread was 185bps. It was down to 128bps on
December 16, 2015, when the Fed hiked the federal funds rate by 25bps.
It was down to 93bps following the release on Wednesday, May 18, of
April’s FOMC minutes, which heightened expectations of a rate hike at
the June 14-15 meeting of the FOMC....MORE
