Stronger Economic Growth Ahead?

August 07, 2013

Recently we have witnessed the much publicized rise in long term interest rates. Meanwhile, short term rates have remained near record lows as evidenced by 3-month Treasury bill yields near zero. The above chart compares the spread between the yield on 10-year Treasury bonds and 3-month Treasury bills with real GDP growth. The chart shows a significant widening of the spread in recent months. Historically, a rising spread between the 10-year and 3-month Treasury bonds has been a predictor of strengthening future economic growth, while a declining or inverted spread often foreshadows slowing economic growth or recession. The ability of changes in the yield curve to be a leading indicator of future economic growth is demonstrated by the sharp drop and inverting of the spread prior to the 2008 recession.

The spread between the 10-year and 3-month Treasury bonds has risen by almost 100 basis points over the past few months. This dramatic steepening of the yield curve is a positive sign for stronger future economic growth, which could provide a catalyst for continued stock market gains.