Although term spreads
have narrowed already by virtue of the global flight to quality, they remain sizeable thus giving the Federal Open Market Committee plenty to go for.
The correlations between current GDP growth and future term spreads shown in the lower panel are negative and for the most part statistically significant for all three countries.
As discussed in more detail in the following section, the pattern of positive correlation between current GDP growth and lagged term spreads and negative correlation between current GDP growth and future term spreads is consistent with more than one explanation of the relationship between the yield curve and output growth.
These variables include interest rates (either 10-year constant maturity Treasury rates or Baa rates), rate deciles (relative to historical rates), credit and term spreads, and price-earnings and market-to-book ratios, factors that indicate market growth.
We are concerned that debt issuance might occur not because of low rates relative to historical levels, but because of attractive credit spreads and term spreads.
Besides term spreads
(between different maturities of the same sort of bonds), one can look at risk spreads (between different bonds of the same maturity).
The term spreads between short- and long-term interest rates have narrowed since 2004, and have even turned negative in the UK and the US, as shown in figure 4.
The current drop in US term spreads differs from previous episodes, as it is associated with low long-term real interest rates, whereas previous inverted yield curves have been associated with periods of tight monetary conditions (ECB, 2006).
19 Mishkin (1990a) also finds that in full sample regressions the coefficients that appear on term spreads
are generally smaller in size than those in pre-1979 regressions.
I regress one-month-ahead market excess returns on lagged aggregate cash holdings and several widely used predictive variables including dividend yield, default spreads, and term spreads
Besides term spreads
(between different maturities of the same sort of bonds) one can look at risk spreads (between different bonds of the same maturity).
In addition to such risk spreads, people also look at term spreads
, that is, the spread between rates on Treasury securities with different maturities.