Friday, October 21, 2016

The Yield Curve – October 21, 2016

Many people believe that the Yield Curve is an important economic indicator.
On March 1, 2010, I wrote a post on the issue, titled “The Yield Curve As A Leading Economic Indicator.”
An excerpt from that post:
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.
While I continue to have the above-stated reservations regarding the “yield curve” as an indicator, I do believe that it should be monitored.
As an indication of the yield curve, below is a weekly chart from January 1, 1990 through October 20, 2016.  The top two plots show the 10-Year Treasury and 2-Year Treasury yields.  The third plot shows the (yield) spread between the 10-Year Treasury and 2-Year Treasury, with the October 20, 2016 closing value of .92%.  The bottom plot shows the S&P500:
(click on chart to enlarge image)(chart courtesy of; chart creation and annotation by the author)
Yield Curve with subcomponents
Additionally, below is a chart showing the same spread between the 10-Year Treasury and 2-Year Treasury, albeit with a slightly different measurement, using constant maturity securities.  This daily chart is from June 1, 1976 through October 19, 2016, with recessionary periods shown in gray. This chart shows a value of .95%:
source:  Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed October 21, 2016:
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2139.60 as this post is written

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