IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2018-55.html
   My bibliography  Save this paper

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

Author

Abstract

The spread between the yield on a 10-year Treasury bond and the yield on a shorter maturity bond, such as a 2-year Treasury, is commonly used as an indicator for predicting U.S. recessions. We show that such ?long-term spreads? are statistically dominated in recession prediction models by an economically more intuitive alternative, a \"\"near-term forward spread.\"\" This latter spread can be interpreted as a measure of the market's expectations for the near-term trajectory of conventional monetary policy rates. The predictive power of our near-term forward spread indicates that, when market participants expected?and priced in?a monetary policy easing over the next 12-18 months, this indicated that a recession was quite likely in the offing. Yields on bonds beyond 18 months in maturity are shown to have no added value for forecasting either recessions or the growth rate of GDP.

Suggested Citation

  • Eric Engstrom & Steven A. Sharpe, 2018. "The Near-Term Forward Yield Spread as a Leading Indicator : A Less Distorted Mirror," Finance and Economics Discussion Series 2018-055, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2018-55
    DOI: 10.17016/FEDS.2018.055
    as

    Download full text from publisher

    File URL: https://www.federalreserve.gov/econres/feds/files/2018055pap.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.17016/FEDS.2018.055?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael D. Bauer & Thomas M. Mertens, 2018. "Economic Forecasts with the Yield Curve," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    2. Peter Johansson & Andrew C. Meldrum, 2018. "Predicting Recession Probabilities Using the Slope of the Yield Curve," FEDS Notes 2018-03-01-3, Board of Governors of the Federal Reserve System (U.S.).
    3. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Massimo Ferrari Minesso & Laura Lebastard & Helena Mezo, 2023. "Text-Based Recession Probabilities," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(2), pages 415-438, June.
    2. Gardner, Ben & Scotti, Chiara & Vega, Clara, 2022. "Words speak as loudly as actions: Central bank communication and the response of equity prices to macroeconomic announcements," Journal of Econometrics, Elsevier, vol. 231(2), pages 387-409.
    3. Okimoto, Tatsuyoshi & Takaoka, Sumiko, 2022. "The credit spread curve distribution and economic fluctuations in Japan," Journal of International Money and Finance, Elsevier, vol. 122(C).
    4. Schlömer, Johnny Barrelli & Palazzi, Rafael Baptista & Klotzle, Marcelo Cabus, 2024. "Near-term forward rate spread and commodity index relationship with real economic activity in Brazil," Finance Research Letters, Elsevier, vol. 65(C).
    5. Szczygielski, Jan Jakub & Charteris, Ailie & Obojska, Lidia & Brzeszczyński, Janusz, 2024. "Recession fears and stock markets: An application of directional wavelet coherence and a machine learning-based economic agent-determined Google fear index," Research in International Business and Finance, Elsevier, vol. 72(PA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. B. De Backer & M. Deroose & Ch. Van Nieuwenhuyze, 2019. "Is a recession imminent? The signal of the yield curve," Economic Review, National Bank of Belgium, issue i, pages 69-93, June.
    2. Lael Brainard, 2018. "Sustaining Full Employment and Inflation around Target : a speech at the Forecasters Club of New York, New York, New York, May 31, 2018," Speech 1005, Board of Governors of the Federal Reserve System (U.S.).
    3. Ibarra-Ramírez Raúl, 2021. "The Yield Curve as a Predictor of Economic Activity in Mexico: The Role of the Term Premium," Working Papers 2021-07, Banco de México.
    4. Massimo Ferrari Minesso & Laura Lebastard & Helena Mezo, 2023. "Text-Based Recession Probabilities," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(2), pages 415-438, June.
    5. Martin Pažický, 2021. "Predicting Recessions in Germany Using the German and the US Yield Curve," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 17(3), pages 263-291, December.
    6. Joseph G. Haubrich, 2021. "Does the Yield Curve Predict Output?," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 341-362, November.
    7. Jaehyuk Choi & Desheng Ge & Kyu Ho Kang & Sungbin Sohn, 2021. "Yield Spread Selection in Predicting Recession Probabilities: A Machine Learning Approach," Papers 2101.09394, arXiv.org, revised Jan 2022.
    8. Pilar Lopez-Llompart & G. Mathias Kondolf, 2016. "Encroachments in floodways of the Mississippi River and Tributaries Project," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 81(1), pages 513-542, March.
    9. Cheng, Jianquan & Bertolini, Luca, 2013. "Measuring urban job accessibility with distance decay, competition and diversity," Journal of Transport Geography, Elsevier, vol. 30(C), pages 100-109.
    10. M. De Donno & M. Pratelli, 2006. "A theory of stochastic integration for bond markets," Papers math/0602532, arXiv.org.
    11. Prilly Oktoviany & Robert Knobloch & Ralf Korn, 2021. "A machine learning-based price state prediction model for agricultural commodities using external factors," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1063-1085, December.
    12. Michelle Sheran Sylvester, 2007. "The Career and Family Choices of Women: A Dynamic Analysis of Labor Force Participation, Schooling, Marriage and Fertility Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 367-399, July.
    13. Henrekson, Magnus & Johansson, Dan, 2010. "Firm Growth, Institutions and Structural Transformation," Ratio Working Papers 150, The Ratio Institute.
    14. Karen K. Lewis, 2011. "Global Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 435-466, December.
    15. DAVID M. BLAU & WILBERT van der KLAAUW, 2013. "What Determines Family Structure?," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 579-604, January.
    16. Panagiota DIONYSOPOULOU & Georgios SVARNIAS & Theodore PAPAILIAS, 2021. "Total Quality Management In Public Sector, Case Study: Customs Service," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(1), pages 153-168, June.
    17. Afanasyev, Dmitriy O. & Fedorova, Elena A. & Popov, Viktor U., 2015. "Fine structure of the price–demand relationship in the electricity market: Multi-scale correlation analysis," Energy Economics, Elsevier, vol. 51(C), pages 215-226.
    18. Peter Viggo Jakobsen, 2009. "Small States, Big Influence: The Overlooked Nordic Influence on the Civilian ESDP," Journal of Common Market Studies, Wiley Blackwell, vol. 47(1), pages 81-102, January.
    19. Julie Holland Mortimer, 2007. "Price Discrimination, Copyright Law, and Technological Innovation: Evidence from the Introduction of DVDs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1307-1350.
    20. Suwan Shen & Xi Feng & Zhong Ren Peng, 2016. "A framework to analyze vulnerability of critical infrastructure to climate change: the case of a coastal community in Florida," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 84(1), pages 589-609, October.

    More about this item

    Keywords

    Policy path; recession forecasts; yield spreads; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2018-55. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.