Looking at the 2/10 Spread

Here’s another look at the spread between the 10-year and 2-year Treasuries. I like to check in on this metric every so often because it has a decent track record of going negative before a recession starts.

There are many indicators that tell us if we’re currently in a recession but it’s hard to find a good one that’s a leading indicator. Note how often the 2/10 spread has gone negative before the grey bars (which are official recessions).

The spread is still over 140 basis points which is far from the danger area. In fact, the spread has been rising recently.

Of course, not all metrics are perfect including one like this which has done so well from the last 30 years. The problem is that the 2/10 spread may not work so well in an era of zero short-term interest rates. The two-year is currently going for about 0.25% so it’s hard for the 10-year to fall below that.

Posted by on October 4th, 2012 at 12:36 pm

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