David Rosenberg: Yield curve points to blue skies for U.S. economy

Let the yield curve do the talking

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The yield curve is a pretty useful leading indicator for the U.S. economy, and, despite views to the contrary, the sky looks pretty blue right now.

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., noted that the early-2000s recession didn’t officially begin until April 2001, but the yield curve was “aggressively waving the caution flag” back in December 1998. The 12-month-ahead recession probability based on the yield curve at that time was 35 per cent.

The spread between short- and long-term yields has also predicted recessions one year early in six of the past seven instances since the 1960s.

There’s plenty of concern these days that while a technical recession may be avoided, the U.S. economy remains so weak that it can’t handle an interest rate hike from the U.S. Federal Reserve. The caution comes in large part from U.S. Treasuries being unable to break out in any meaningful manner, even when bullish economic data or signs of rising inflation pressures emerge.

But Rosenberg noted that the level of yields is less important in predicting the direction of the economy than the slope of the Treasury yield curve. In other words, “let the yield curve do the talking.”

What’s the curve saying these days? Rosenberg noted that the current 225-basis-point spread between the U.S. 10-year note and the three-month T-bill yield implies the odds of a recession in the next 12 months at just 1.9 per cent.