Bernanke's Key Recession Indicator: Reliable As a Coin Flip

by: TickerSense

One of the takeaways from Fed Chairman Bernanke's speech on Monday night was that the economy will remain strong given that corporate bond spreads remain at relatively low levels and have not shown significant widening throughout the current rate tightening campaign.

We would caution investors not too place too much emphasis on this indicator. The chart below shows the historical levels of the spread between yields on 'Baa' rated corporate bonds and the yield on 10-year treasuries, with recessions noted by gray shading:

In the six months prior to the last recession in 2001, spreads between corporates and treasuries rose by 50 bps. However, in the five previous recessions widening of corporate spreads appears to be more coincident with the onset of a recession than anticipatory. In three of the six recessions since 1962, corporate spreads actually declined in the six months preceding a recession. Coin flip anyone?