With the Fed lowering the rates quickly over the last two weeks, the Federal Funds target rate is once again below the 10 year Treasury. It had been lower than the 10 year Treasury (making it an inverted yield curve) for most of the last year and a half. The yield curve has inverted in all 6 previous recessions.
The Fed Funds has dipped below the 10 year Treasuries 4 other times since 1962 without formally entering a recession. In 1966, the yield curve inverted without a recession, however, the S &P 500 dropped 23.7% from its high to low during that period. The Fed Funds also dipped below the 10 year Treasuries once in the mid-eighties and once in the mid-nineties and again in 1998 (Long Term Capital Management blowup). However in all cases the 1 year Treasury did not dip below the 10-year Treasury.
The TED Spread is the difference between the Treasury and the EuroDollar (T-ED). The TED Spread is a good barometer of the short term risk perceived by banks. It has come down a bit from its recent levels, but is still at an elevated level.
Companies receiving a Moody’s Baa ratings are considered to be medium grade risks. The spread between Moody’s Baa and the 10 year Treasury is at a high level right now showing the effects of the credit crunch. However, the Baa spread does not seem to have as much correlation with the S&P 500 and the economy. It often peaks a year after the recovery has begun.
It takes time for rate cuts to affect the economy. The yield curve often turns positive very early in the recession stage. In 1989, the yield curve turned positive right before the recession started. In 2001, the yield curve turned positive just weeks after the official start of the recession.
Here are charts going back to 1962. You can click on the charts for a larger view.
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