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Yield Curve Back Near Highs

Bespoke Investment Group

March 31, 2010



With long-term interest rates rising and short-term rates remaining contained, the rising yield curve is once again starting to receive attention.  For those who are unfamiliar with the yield curve, we strongly suggest reading the NY Fed's discussion on the indicator as a leading indicator of economic activity.  In short, high values in the yield curve are positive for the economy, while an inverted yield curve (negative spread between long and short term rates) is a harbinger of economic weakness down the line.  While there are many variant definitions of the yield curve, for our analysis we defer to the NY Fed which defines the yield curve as the difference (in basis points) between the yield on the 10-year and 3-month US Treasuries.  In the chart below, we have highlighted the historical spread between the 10-year and 3-month Treasuries.  As shown in the chart, the curve is currently at the high end of its historical range.  With the exception of 1982, current levels are similar to levels we saw at prior peaks in the curve.  In the current period, the curve has made multiple attempts to break through the 380 bps level, but each time has failed.  Will this be the run that takes the curve through the 400 basis point level?

http://bespokeinvest.squarespace.com/storage/Yield%20Curve%20033010c.png?__SQUARESPACE_CACHEVERSION=1269991699876 

(c) Bespoke Investment Group

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