Because the predicted values of the term spreads
, the green lines, are positive both during and after the 1989:Q1 to 1989:Q2 yield curve inversion, figure 3 indicates that professional forecasters failed to predict the 1989:Q1 to 1989:Q2 yield curve inversion at both a 2-quarter-ahead and 4-quarter-ahead horizons.
now are fairly low, but are not yet in negative territory.
(2009) note that small stocks outperform large stocks during economic expansions and that both small and value stocks outperform large and growth stocks, respectively, when T-Bill rates are low and term spreads
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.
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).
Moreover, the level of nominal interest rates and term spreads
are high in times when inflation news are harder to interpret.
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.
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.
Lopez-Salido et al add a third variable - term spreads
between long-term and short-term Treasuries.
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.