Figure 1: Ten year federal government bond yields minus three month rates for US (black), UK (teal), Germany (orange), and Japan (red), %. 3 month rates are federal government bond yields for US, interbank rates for others. NBER defined peak-to-trough United States economic downturn dates shaded gray. Source: Treasury via FRED, OECD Main Economic Indicators, upgraded with Tradingeconomics.com, NBER, and authors computations.
Foreign yield curves in Germany (proxy for Euro location) and UK are inverting. The Japanese term spread remains positive.
We likewise recognize the reaction of the dollar to call spread shocks.
Relying on GDP growth, Figure 4 shows impulse reaction functions in response to a 1 ppt increase in the US( foreign) 10yr-3mo spread.
Here si the existing situation with regard to 10yr-3mo spreads (Treasury minus 3 month Treasury or interbank, depending on what OECD reports):.
Our brief answer: yes.
This paper shows that foreign term spreads constructed from bond yields of non-U.S. G-7 constituents anticipate future U.S. economic downturns and that foreign term spreads are stronger predictors of U.S. recessions happening within the next year than U.S. term spreads. Smaller sized U.S. term spreads out lead to smaller foreign term spreads and U.S. Dollar gratitude. Smaller sized foreign term spreads do not lead to significant U.S. Dollar devaluation but do lead to relentless declines in U.S. exports and FDI flows into the United States. A favorable shock to the United States spread values the dollar, while one to the foreign spread depreciates the dollar.
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These AUROCs relate to columns (1 ), (2 ), and (4) in Table A. 1. Notification we are not stating the United States term spread is not predictive; just that including the foreign term spread and a variety of other United States variables, leads to a not-statistically-significant coefficient on the US term spread (the United States term spread does reveal up as signficant in column (3 )).
A positive shock to the United States spread values the dollar, while one to the foreign spread depreciates the dollar. However, just the United States IRF reveals analytical significance. This finding follows Chen and Tsang (2013 )
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From NBER working paper No. 30737 (update of findings in this post) by myself and Rashad Ahmed, out today (abstract):.
This paper shows that foreign term spreads constructed from bond yields of non-U.S. G-7 constituents forecast future U.S. recessions and that foreign term spreads are stronger predictors of U.S. recessions occurring within the next year than U.S. term spreads. Smaller sized U.S. term spreads out lead to smaller sized foreign term spreads and U.S. Dollar appreciation.
Heres the AUROC for US term spread just (model 1), for foreign term spread just (design 2), and United States and foreign term spread plus monetary conditions plus other variables index (model)
