Good News Friday - May 28, 2010

Yielding to Reason

With prospects for Greece, Spain and the euro looking shaky, fears of a double-dip recession have grown. But one indicator says that’s not likely at least in the U.S. The yield curve, the spread between short and long-term interest rates, continues to point toward growth. A reliable predictor of recessions, the yield curve is in a normal position meaning that U.S. Treasury securities with longer terms have higher yields. This is normal because investors demand higher yields to compensate for the greater uncertainty (increased risk) of holding longer-term bonds. An inverted yield curve, which precedes a recession by four to six quarters, means that longer-term bonds have lower yields because investors expect a weakening economy to reduce inflation pressures and interest rates, causing bond prices to rise in the future. The current normal yield curve suggests the chance of a double-dip recession remains low.

For more information on the yield curve,

• Click here to view a graph from the Federal Reserve Bank of New York showing a 50-year history of the yield curve versus recessions. Note how the yield curve has fallen before every recession (the gray bands) including the one that began in December 2007 (not shown.) Note, too, the bottom graph indicating that the current probability of a recession remains low.
• Click here to view a “dynamic yield curve” from StockCharts.com. Wait a few seconds for the graphs to appear, then click on the “animate” button to view the relationship between the stock market and the yield curve from 2002 through yesterday.
• And finally, click here for a discussion of the yield curve in Q&A format from the New York Fed.

Have a great weekend.

Best regards,

Robert Bach
SVP, Chief Economist
Grubb & Ellis
312.698.6754