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Albert Sung is the author of the Katchum Macro-Economic Blog, monitoring breaking economic news from a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at... More
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  • Correlation: Recession Vs. Treasury Yield Spread 0 comments
    Mar 30, 2013 3:14 PM

    I came across an interesting article that gives an empirical correlation between the yield spread between the 10 year and 3 month treasuries/bills and the probability of a recession when that yield spread narrows.

    The key is to monitor that the 10 year yield is always higher than the 3 month yield. If the 10 year yield starts to go closer to the 3 month yield and even goes below it, then we have a high probability of a recession.

    That correlation can be witnessed on chart 1. Each time the blue line goes below zero, we have a recession.

    (click to enlarge)

    Chart 1: Recession Vs. Yield Spread

    The last recession was in 2008. A few years before, the yield spread went to zero. Today we're in pretty safe territory (Chart 2). But it pays off to watch the yield spread each month or so.

    (click to enlarge)

    Chart 2: U.S. bond yields

    This theory is applicable to every country. I analyzed Spain for example in this article.

    Chart 3: Spanish Bond Yields (10 year vs 2 year)

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