The Steepening Yield Curve
A year ago, spreads between the long bond and the 2-year note were close to zero. At the start of February 2007 we were looking at a slightly inverted yield curve, often a predictor of a recession. Now, a year later, the spread is approaching 300 basis points, hitting 292 on Friday. We haven't hit spreads that wide since 2004.
Here are some observations from the 10 year history of the yields:
- The spread between the 30 yr bond and the 2 yr note is approaching 300 basis points. At the time of this post, it is about 280.
- The record spread between the two was in August 2003 just after the Fed held the Fed Funds target at 1.0%. The spread hit 370.5 bps.
- Noting the cycle, the spread seems to peak well before the Fed begins raising rates
- The yield curve historically inverts before a recession - It did so in 2000 and was slightly inverted in 2006 and in early 2007
- The slope of the spread curve is still increasing so it probably has room to go
Current treasury yields are as follows (Thomson):
- US.30 - 4.426
- US.10 - 3.554
- US.05 - 2.507
- US.03 - 3.090
- US.02 - 1.643
- US.06M - 1.806
- US.03M - 1.665
Lehman Brothers Bond Index Yields (Lehman Brothers):
- US Aggregate - 4.587
- US Government / Credit - 3.962
- US High Yield - 10.644
- US Treasury - 2.744
- US Corporates - 5.572
- Munis - 4.422