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Term Spread, September 5, 2017

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Includes: BIL, CLTL, DFVL, DFVS, DLBL-OLD, DLBS, DTUL, DTUS, DTYL, DTYS, EDV, EGF, FIBR, FTT, GBIL, GOVT, GSY, HYDD, IEF, IEI, PLW, PST, RISE, SCHO, SCHR, SHV, SHY, SPTI, SPTL, SPTS, TAPR, TBF, TBT, TBX, TBZ, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBT, UST, VGIT, VGLT, VGSH, VUSTX, ZROZ
by: Econbrowser

Editor's note: This article was originally published on September 5, 2017, by Menzie Chinn here.

As I was compiling background notes for the new semester, I found the current level and trend in the term spread of interest.

Figure 1: Ten-year minus three-month Treasury spread (blue), and ten-year minus two-year spread (red), %. Observations for September are 9/5. NBER defined recession dates shaded gray. Source: FRED, Bloomberg, NBER and author's calculations.

Run the probit regression

recessiont+6 = -0.81 -0.474×(GS10-TB3MS)t + 0.065×TB3MSt + ut

over the 1967M01-2017M02 period (McFadden R2 = 0.24); the implied probability of recession is 10% for February 2018.

Using a specification without the level of the short rate included leads to a slightly higher probability, 14% or so.

The detail is also interesting. The spreads are smaller than they were in October 2016.

Figure 2: Ten-year minus three-month Treasury spread (blue), and ten-year minus two-year spread (red), %. Observations for September are 9/5. Source: FRED, Bloomberg, and author's calculations.