Moody’s: HY Bond Spread Unreliable Indicator

August 30, 2010

According to a report published by Moody’s Investors Service Monday, the high yield bond spread is unreliable and the Treasury yield curve’s effectiveness is compromised by the three-month Treasury bill’s 0.15% rate. 

The report points out that the high yield bond spread’s moves to 682 bps in October of 1998 and to 1,064 in October 2002 were not followed by recessions but by improved expenditures. Also, despite a thin high yield bond spread of 279 bps in June 2007, the U.S. entered a recession six months later.

“Among all conceivable candidates, the slope of the Treasury yield curve has proven to be one of the more reliable predictors of economic activity,” wrote Moody’s Chief Economist John Lonski in the report. “Each recession since the 1960s was preceded by an inverted Treasury yield curve.”

“Nevertheless,” Lonski noted, “the predictive power of the Treasury yield curve may now be greatly diminished by the extraordinarily low 0.15% three-month Treasury bill rate.”

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