Abstract: This paper presents empirical evidence on the role of yield spread
in predicting inflation and output growth in Pakistan.
Ball and Croushore show that the SPF output forecasts are inefficient with respect to changes in monetary policy, as measured by changes in real interest rates, while Rudebusch and Williams show that the forecasts are inefficient with respect to the yield spread
. In this paper, the authors investigate the robustness of both claims of inefficiency, using real-time data and exploring the impact of alternative sample periods on the results.
For the fourth consecutive week, the two largest positive contributions over the past year were made by the Merrill Lynch High-Yield Corporate Master II Index (Mlynch_HighYld_MasterII) and by the yield spread
between that same index and the 10-year U.S.
The yield spread
over US treasuries would be much larger if oil price continues to be at low levels, but if it increase to $50 per barrel level, yields spreads could be in the range of 200-250 bps over US Treasuries.
"This is an area in the fixed income market that has been shunned by a lot of fixed income investors," said Bernstein, noting the proof of that is the wide yield spread
between munis and other bond markets.
We use past values of the yield spread
and GDP growth to project what real GDP will be in the future.
The S&P closed the week at 1,967.90 while the yield spread
tightened slightly to 107 basis points.
We use a sample of 13,037 yield spread
observations of industrial issuers from 1994 to 2005.
Pairwise cointegration tests are conducted by regressing each country's yield spread
versus Germany on a constant term [[beta].sub.0].
The yield spread
between this issue and a longer-term bond of Promsvyazbank (-/Ba2/BB-) PROMBK-19 has been in place only since June 26.
The economic fundamentals include the federal funds rate and interest rate spreads, such as the 1-year-1-month LIBOR spread and the 10-year nominal Treasury--10-year Treasury Inflation-Protected Securities (TIPS) yield spread
. These variables are intended to capture inflation expectations and uncertainty due to monetary policy.