Monday, March 1, 2010

The Yield Curve As A Leading Indicator

Here is a link to the NY Fed's page regarding the yield curve (specifically the 10-year rates vs. 3-month rates) as a leading indicator.

What I find interesting is that the chart (pdf, at this link) plotting the current probability of recession indicates an imperceptibly small .04% chance of recession as of January 2010. As seen in the chart (as well as accompanying data file) the recent peak was in the 40%-50% range in the latter part of 2007 and into 2008.

Of course, I strongly disagree that there is currently a .04% of recession.

On the NY Fed link above, they have posted numerous studies that support the theory that the yield curve is a leading indicator. My objections with using it as a leading indicator, especially now, are various. These objections include: I don't think such a narrow measure is one that can be relied upon; both the yields at the short and long-end of the curve have been overtly and officially manipulated, thus distorting the curve; and, although the yield curve may have been an accurate leading indicator in the past, this period of economic weakness is inherently dissimilar in nature from past recessions and depressions in a multitude of ways - thus, historical yardsticks and metrics probably won't (and have not) proven appropriate.

SPX at 1110.87 as this post is written

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