Updated: 03-18-2019

Check in from 10 to 3
Updated: 14-Mar-19  04:31PM ET
Analyst: Pat O'Hare

August 31, 2018... December 27, 2018... and March 14, 2019. Why do these dates matter? They don't -- not yet anyway -- but they could potentially mean a lot more in hindsight.

Those dates mark the line of progression in our coverage of the spread between the 10-yr note yield and the 3-month bill yield. We thought another check-in would be in order, recognizing that there has been an orderly contraction in that spread that is certain to be grabbing the attention of many economists.

Why would that be?

Last year, researchers at the Federal Reserve Bank of San Francisco published an economic letterthat highlighted the 10Yr-3Mo spread as the most reliable predictor of recession among the different term spreads.

When we reviewed that letter in this space on August 31, the spread stood at 72 basis points. When we provided an update in December, the spread had narrowed to 32 basis points. Today, the spread sits at just 17 basis points.

Notably, the 3-month bill yield matches the yield for the 2-yr note and exceeds the yields for the 3-yr note (2.41%) and the 5-yr note (2.43%). It also exceeds the S&P 500 dividend yield (2.1%).

That is something to account for when considering one's risk tolerance, yet it is largely beside today's point, which is to assert that the trend in the 10Yr-3Mo spread relationship has not moved in a fashion that is indicative of a robust economic outlook.  That assessment holds true for term spreads across the Treasury yield curve. 

To be fair, high-yield spreads have widened some, but they aren't necessarily ringing any economic alarm bells at this point.

The latter point notwithstanding, if the 10Yr-3Mo spread keeps trending in the same direction, it will invert relatively soon.

Should that happen, it will create a talking point that has been muted mostly by market participants' attention on the 10Yr-2Yr spread, which sits at just 17 basis points, too, as of March 14, 2019.

1 Bauer, Michael D., and Thomas M. Mertens. 2018. "Information in the Yield Curve about Future Recessions." FRBSF Economic Letter 2018-20 (August 27).

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