“Do overseas yield curves predict US recessions and GDP progress?”

Our brief reply: sure.

From NBER working paper No. 30737 (replace of findings on this post) on my own and Rashad Ahmed, out in the present day (summary):

This paper exhibits that overseas time period spreads constructed from bond yields of non-U.S. G-7 constituents predict future U.S. recessions and that overseas time period spreads are stronger predictors of U.S. recessions occurring inside the subsequent 12 months than U.S. time period spreads. U.S. and overseas time period spreads are each informative of the U.S. economic system however over different horizons and for different parts of financial exercise. Smaller U.S. time period spreads result in smaller overseas time period spreads and U.S. Greenback appreciation. Smaller overseas time period spreads don’t result in significant U.S. Greenback depreciation however do result in persistent declines in U.S. exports and FDI flows into the US. These findings are in line with the proposition that overseas time period spreads embed progress spillovers from the U.S. and the ensuing Greenback power and slowdown overseas spill again to the US.

Right here’s the AUROC for US time period unfold solely (mannequin 1), for overseas time period unfold solely (mannequin 2), and US and overseas time period unfold plus different variables plus monetary situations index (mannequin).


These AUROCs pertain to columns (1), (2), and (4) in Desk A.1. Discover we aren’t saying the US time period unfold is just not predictive; simply that together with the overseas time period unfold and a slew of different US variables, leads to a not-statistically-significant coefficient on the US time period unfold (the US time period unfold does present up as signficant in column (3)).

Turning to GDP progress, Determine 4 exhibits impulse response capabilities in response to a 1 ppt improve within the US(overseas) 10yr-3mo unfold.

Right here si the present scenario with respect to 10yr-3mo spreads (Treasury minus 3 month Treasury or interbank, relying on what OECD experiences):

Determine 1: Ten 12 months authorities bond yields minus three month charges for US (black), UK (teal), Germany (orange), and Japan (pink), %. Three month charges are authorities bond yields for US, interbank charges for others. NBER outlined peak-to-trough US recession dates shaded grey. Supply: Treasury through FRED, OECD Major Financial Indicators, up to date with Tradingeconomics.com, NBER, and writer’s calculations.

International yield curves in Germany (proxy for Euro space) and UK are inverting. The Japanese time period unfold stays constructive nevertheless.

We additionally establish the response of the greenback to time period unfold shocks.

A constructive shock to the US unfold appreciates the greenback, whereas one to the overseas unfold depreciates the greenback. Nonetheless, solely the US IRF exhibits statistical significance. This discovering is in line with Chen and Tsang (2013).


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