The Term Spread as a Predictor of Financial Instability
Liberty Street Economics spiking the football OR sending a warning?
This post from the folks at Liberty Street Economics hitting inboxes across the land on what is said to be one of THE busiest travel days of the year …
I’m sure it is NOT an effort to hide anything important, at least not intentionally … Thought I’d leave this one here for reference
NOVEMBER 24, 2021
The Term Spread as a PREDICTOR of Financial Instability
…Conclusion
The term spread is often used as an early warning indicator for recessions. In this post, we showed that it performs well as a predictor of financial crises, both internationally and in the United States alone. There is a significant benefit to including the term spread as a predictor for two separate crisis definitions. We identified that this effect is driven by the short end of the yield curve rising and offered a potential explanation based in higher risk taking by financial intermediaries in the time before a crisis.
With THAT in mind, I’ll leave you with a look at the 3mo10y (ie the ‘financial’ curve).
Sure there are good TRADES out there to watch, anticipate and fade as Fed hike cycles anticipated — 2s10s and 5s30s curves flattening / steepening etc…
Meanwhile, the Fed may in fact be worrying about a (3mo10yr) curve STEEPENING in as far as PREDICTOR … You tell me.
Signal or noise?