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Pastimes : Ask Mohan about the Market
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To: Investor2 who wrote (11959)12/20/1997 11:28:00 AM
From: Tommaso  Read Replies (2) of 18056
 
Thanks very much for the link to the article of the yield spread.

It appears from the article and the table that the relationship does not become very significant (as a predictor or a recession) until the spread is at least a minus one percent. At this point the spread is still positive.

Would it be possible to become extremely speculaive and guess that, without action by the Fed to raise short-term rates, long-term rates could decline enough to predict (maybe cause) a recession? If the 10-year rate should decline another 1.5 percentage points, and the short term rate stay the same, you would have a spread that favored a recession.

You would also have a hell of a bull market in bonds.

I agree with you that it seems unlikely that the Fed would wish to deliberately cause a recession by raising short-term rates so as to create the negative yield spread.

But a panicky flight into the safety of longer treasuries could have the same effect.

Just some thoughts and guesses.
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