The Near-Term Forward Yield Spread as a Leading Indicator: A Less Distorted Mirror

Eric C. Engstrom and Steven Sharpe

Financial Analysts Journal, 2019, vol. 75, issue 4, 37-49

Abstract: 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. Disclosure: The views herein are those of the authors and do not necessarily reflect those of the Board of Governors of the Federal Reserve System or its staff. Editor’s note Submitted 16 July 2018Accepted 24 April 2019 by Stephen J. Brown

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1080/0015198X.2019.1625617 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The Near-Term Forward Yield Spread as a Leading Indicator: A Less Distorted Mirror (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ufajxx:v:75:y:2019:i:4:p:37-49

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ufaj20

DOI: 10.1080/0015198X.2019.1625617

Access Statistics for this article

Financial Analysts Journal is currently edited by Maryann Dupes

More articles in Financial Analysts Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().