Yield Curve Update – March 12, 2016

Yep, we’re back here again. Why? It’s just that important.

A wealth manager at the Canadian firm of Gluskin Sheff opined, “If I were alone on a desert island, as some people probably wish I was, and I had one tool in the kit to use for predictive purposes, it would be the yield curve.”   Funny guy!

Really?  Is the yield curve that important, that predictive?  Yes.  Really.  It is.   Check out this graphic:

The green line is the ‘spread’  – the difference between the 10-year Treasury and the 3-month T-bill.  The red circles identify the point of maximum inversion (or minimal spread).  The vertical gray lines indicate periods of US recession.

As you can see, the point of maximum inversion (or minimal spread) preceded the recessions that began in 1969, 1973, 1981,  1990, 2001, and 2007.   6 of the prior 7 recessions.  An interesting corollary to note from this graph:  After each recession, as the economy strengthened, the yield curve steepened quickly.

OK, maybe we didn’t have a steep inversion before the past 3, but the curve flattened.

How is the ‘spread’ and curve today?  Good.  Nice and steep.   Recall our prior reading was 155…and the week before, 143.    Yesterday, on the 11th, we were at 165.   Again, the yield curve became slightly steeper.   This suggests our economy remains robust.

We’ll start graphing the yield curve in the next post, as we’re now collecting a fair amount of data.  So, stay tuned!   More to come!

• Terry Liebman