Economy

Term Spread, September 5, 2017

Sep. 07, 2017 2:50 AM ETTLT, TBT, TMV, IEF, SHY, TBF, EDV, TMF, TTT, PST, ZROZ, VGLT, IEI, TLH, PLW, UBT, UST, VGSH, BIL, DTYS, VGIT, TYO, SPTL, DLBS, GOVT, SCHO, SHV, GSY, SCHR, TBX, VUSTX, TYD, SPTI, SPTS, EGF, DTYL, TAPR, DTUS, FTT, TYBS, TUZ, DTUL, DLBL-OLD, DFVL, DFVS, TBZ, FIBR, RISE, TYNS, GBIL, HYDD, CLTL

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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

recession_t+6 = -0.81 -0.474×(GS10-TB3MS)_t + 0.065×TB3MS_t + u_t

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.

This article was written by

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James D. Hamilton has been a professor in the Economics Department at the University of California at San Diego since 1992. He served as department chair from 1999-2002, and has also taught at Harvard University and the University of Virginia. He received a Ph.D. in economics from the University of California at Berkeley in 1983. Professor Hamilton has published articles on a wide range of topics including econometrics, business cycles, monetary policy, and energy markets. His graduate textbook on time series analysis has over 14,000 scholarly citations and has been translated into Chinese, Japanese, and Italian. Academic honors include election as a Fellow of the Econometric Society and Research Associate with the National Bureau of Economic Research. He has been a visiting scholar at the Federal Reserve Board in Washington, DC, as well as the Federal Reserve Banks of Atlanta, Boston, New York, Richmond, and San Francisco. He has also been a consultant for the National Academy of Sciences, Commodity Futures Trading Commission and the European Central Bank and has testified before the United States Congress. _________________________________________________ Menzie D. Chinn is Professor of Public Affairs and Economics at the University of Wisconsin’s Robert M. La Follette School of Public Affairs. His research is focused on international finance and macroeconomics. He is currently a co-editor of the Journal of International Money and Finance, and an associate editor of the Journal of Money, Credit and Banking, and was formerly an associate editor at the Journal of International Economics and the Review of International Economics. In 2000-2001, Professor Chinn served as Senior Staff Economist for International Finance on the President’s Council of Economic Advisers. He is currently a Research Fellow in the International Finance and Macroeconomics Program of the National Bureau of Economic Research, and has been a visiting scholar at the International Monetary Fund, the Congressional Budget Office, the Federal Reserve Board and the European Central Bank. He currently serves on the CBO Panel of Economic Advisers. With Jeffry Frieden, he is coauthor of Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (2011, W.W. Norton). He is also a contributor to Econbrowser, a weblog on macroeconomic issues. Prior to his appointment at the University of Wisconsin–Madison in 2003, Professor Chinn taught at the University of California, Santa Cruz. He received his doctorate in Economics from the University of California, Berkeley, and his AB from Harvard University.