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2 Studies on the Flattening Yield Curve

Posted By Barry Ritholtz On December 29, 2005 @ 6:24 am In Federal Reserve,Fixed Income/Interest Rates,Inflation,Technical Analysis | Comments Disabled

A reader asked about prior studies on a flattening or inverting yield curve, wondering  "what have they concluded?"

Quite a few other analysts have looked into the question. Here are two worth considering:

Bill Gross, who manages the world’s largest Bond fund — and therefore better know about this stuff –  featured the chart below last month [1].

Gross’ conclusion? "By the time 10-year and 2-year Treasuries reach parity, as is almost
the case now, the economy is typically slowing and the Fed is at or
near the end of its tightening cycle."

Here is his relevant chart:

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click for larger graphic

Bg_inversion [2]

Courtesy of PIMco [1]

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Gross also observed that "Economists/investment managers are aware of the potency of a flattening yield curve (shown in Chart above). . . Only [former Fed Chair] Volcker, with his need to strangle inflation out of the system, persisted into negative yield curve territory for longer than a few months."

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Further, I happened to come across this commentary — A Study on the Flattening Yield Curve [3] — of post-1970 inversions.

The study’s generalized conclusions?

  1. Recessions have been preceded by yield curve inversions since 1970.
  2. lead time averages over 40 weeks.
  3. The S&P 500 does not do well when the yield curve is inverted (performance measured over the entire span of the inversion).

The chart accompanying that commentary  shows yield curve inversions relative to the S&P500.

 

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click for larger chart

1213_1 [4]

See the rest of the charts form various studies here [3].

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UPDATE: December 29, 2005  1:30PM

I have made repeated references to never relying upon one lonesome single indicator, burt some of the newer reader smay have missed them. For those of you haven’t done so yet, please see Single vs. Multiple Variable Analysis in Market Forecasts [5] . . .

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UPDATE 2: December 29, 2005  3:03PM

Dave Altig of MacroBlog fame suggests NY Fed’s Arturo Estrella yield curve primer:  The Yield Curve as a Leading Indicator [6]. Its another excellent (if somewhat jargon laden) source.

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Source:
Takin’ It To The Blog [1]
Bill Gross
PIMCo Investment Outlook, November 2005
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO+November+2005.htm


A Study on the Flattening Yield Curve

Ron Griess
The Chart Store [7],  December 13, 2005
http://www.financialsense.com/editorials/griess/2005/1213.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/12/2-studies-on-the-flattening-yield-curve/

URLs in this post:

[1] last month: http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO+November+2005.htm

[2] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/bg_inversion.gif

[3] A Study on the Flattening Yield Curve: http://www.financialsense.com/editorials/griess/2005/1213.html

[4] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/1213_1.gif

[5] Single vs. Multiple Variable Analysis in Market Forecasts: http://bigpicture.typepad.com/comments/2005/05/single_vs_multi.html

[6] The Yield Curve as a Leading Indicator: http://www.ny.frb.org/research/capital_markets/ycfaq.html

[7] The Chart Store: http://www.thechartstore.com/

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