Sunday, August 7, 2011

The Treasury Yields Indicate a Worsening Economy too

I know that looking at short-term movements is an imprudent impulse.  Nevertheless, I have been watching the Treasury Yields and the spread is dropping quickly.  I put the first week of August into my spreadsheet (which is on right hand side of the screen) and the average spread between long- and short-term Treasuries has fallen by more than 56 basis points (more than 0.56%)Okay I have found an error in one of my numbers.  And as of today (August 8, 2011) the new number is just above 41 basis points (more than 0.41%).

While this may seem trivial in the face of many other economic problems, it is a clear indicator of the direction of the economy.  The current spread is lower than it was before when QE2 began in October 2010.  That's not even a full year ago!  Is this a sign that the economy is trying to reassert itself over the tampering of the government?  I think YES!

As this spread shrinks, we inch closer and closer to the next recession.


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