Spreading It On Thick

Some forecasters want you to believe that spreads mean everything on the way down, but nothing on the way up. Whatever.
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Muskrat Love

JACKSON HOLE, Wyo. -- And today we're nibbling on bacon. And chewing on cheese.

Check out those spreads!



column maps the difference between the yield on the 10-year Treasury note and the

fed funds rate

. Last month, for example, the 10 averaged 5.90% and the funds rate averaged 4.76% to produce a spread of 1.14% (or 114 basis points). Similarly, the


column maps the difference between the yield on the 10-year Treasury note and the three-month Treasury bill. The bill averaged 4.72% in June, for example, to produce a 10-three spread of 1.18% (or 118 basis points).


Now. The point here, of course, is that these yield-curve spreads have been improving steadily since they bottomed last autumn; they've improved so markedly that they now stand at levels not seen since 1996.

And, because yield-curve spreads are commonly known to be pretty decent predictors of economic growth, one wonders.

Technical Asides

    Those of you not familiar with the relationship between the yield curve and growth will want to read (and print and save) this New York Fed piece.
    Note that the 10-funds spread is the most dominant component of the index of leading economic indicators; it accounts for a full third all by itself.
    The Fed makes available the rates used to calculate the spreads that appear in the table above at its site.

Indeed. Last autumn, when spreads plunged on the Russia-


thing, the market participants who had been repeatedly forecasting an economic slowdown since late 1995 were feeling particularly plucky. They felt vindicated. They figured they finally had some proof, something exponentially better than the dopey "unsustainability" argument, something hard to which they could point and proclaim:

A-ha!! See that?! Here comes the slowdown!! We knew it all along!! Wrong?! We weren't wrong. We may have been three years early, but we were hardly wrong!!

Matter of fact, here's what one of the worst chief economists around (head

here and check the releases from April 1997 for a hint) reckoned the Russia/LTCM-induced drop in spreads meant for 1999.

We expect U.S. gross domestic product to grow only about 1.5% during 1999, perhaps even less. ... By mid-1999, if not before, we expect the federal funds rate to be down to 4%. If that is not enough to put the economy on an even keel, the Fed will keep on easing.

Uh-huh. Cracking call, that.

And, now that spreads have recovered, it is nothing shy of fascinating that so many of those seers are sticking stubbornly to their slowdown forecasts.

The latest from just one of these folks? How about our old


The Tool


The economy is now cooling down. ... A number of special factors have been making the economy look stronger than it really is ... the economy is slowing.

So let me get this straight.

Spreads mean everything on the way down, but nothing on the way up?

Uhh, right.



Well, hey.

You know the saying.

It's not the heat. It's the stupidity.

Side Dish

Getting to like the bond here? In a short-run-trade kind of way?

And No. The bear market that began in November has not fully run its course.

Best fry?