When short-term Treasury yields are at zero, the long-maturity yields would have to go deep into negative-yield territory to create the same level of negative term spreads we have observed in the past before recessions.
While the term spread considers the yield differential between long- and short-maturity securities of the same borrower, the credit spread keeps the maturity constant but considers borrowers of different creditworthiness: namely, the highest-quality (Aaa) and lower-quality (Baa) corporate borrowers.
Lopez-Salido et al add a third variable - term spreads
between long-term and short-term Treasuries.
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.
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.
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.
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.