Term Spreads in 2018: An Annotated History

Today, the 10 year-3 month spread ended below 1%, in the absence of safe haven effects. The 10 year-2 year spread ended at 0.35%.

Figure 1: Ten year constant maturity Treasury minus three month Treasury secondary market yield differential (blue) and Ten year minus two year constant maturity Treasury yields (green), in %. Source: Federal Reserve Board via FRED, Bloomberg for 6/19, and author’s calculations.

In other words, term spreads continue their downward march, albeit influenced to some degree by safe haven effects. For the most of the observations, except for the Italy event, I think the safe haven effect is not dominant. In Figure 2, I show the 10yr-3mo spread and the VIX to verify this assertion.

Figure 2: Ten year constant maturity Treasury minus three month Treasury secondary market yield differential, % (blue, right scale) and VIX (pink, left scale). Source: Federal Reserve Board via FRED, CBOT via FRED, Bloomberg for 6/19, and author’s calculations.

To me, it seems that the more recent negative trade announcements seem to be associated with spread reductions; earlier ones (like the initial reference to Section 232 on aluminum and steel) had less impact.

To some extent, it is hard to see a macroeconomic effect from a mere $50 billion worth of imports being hit by tariffs. However, $200 billion on each side, if it comes to pass, does start getting into “real” money, particularly if it brings a lot of elevated economic and policy uncertainty.

On a side note, I’ve recently heard about yield curve inversion and the 10yr-7yr spread (e.g., here). I’ve honestly never heard of any particular predictive power of this spread, but for completeness, here’s the graph.

Figure 3: Ten year minus seven year constant maturity Treasury yields (blue), in %. NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED, US Treasury for 6/19, and author’s calculations.
For discussion of 10yr-3mo spread and recession prediction, see Chinn and Kucko (2015).

20 thoughts on “Term Spreads in 2018: An Annotated History

  1. Moses Herzog

    You know one question I have, and I assume with all the bright minds in the world (maybe not % wise, but in absolute numbers a lot of bright minds) that at least one other person has thought of before and probably several: When Smoot-Hawley struck we didn’t have the “Global Value Chains” we have now, right?? And even into the ’70s we wouldn’t have had very many “Global Value Chains” (although I assume there were some faint “GVC” blips on the radar screen then). Theoretically, wouldn’t these GVCs create a more “multiplicative effect” (similar to the basic idea of the money multiplier) ?? Instead of the one domino knocking down one domino, you have the one domino that knocks down 3 dominos connected in a single “Global Value Chain”?? Didn’t we see a LITTLE bit of this with ZTE?? And I’m not even talking political issues here, where you take a knife out to stab China in the lower intestines and end up accidentally slicing off Canada’s thumb as you thrust at China’s intestines?? Sorry, I’m obviously not good with metaphors—but you get the idea.

    I mean, not that the Orange Menace would care about any of our Allies any more than the bastard cares about children sitting in cages at ICE prison camps, but…… maybe normal people might care about that.

    1. macroduck

      Worth considering supply chains (a perfectly accurate and not nearly so “consultant speaky” as “global value chain”) don’t reduce the impact of trade sanctions. In one case, we imported relatively more raw materials and finished goods, in the other, more intermediate goods. Does the producer of finished goods have a stronger incentive to continue importing intermediate goods than importers of finished goods have to continue importing finished goods under higher tariffs? I have capital tied up in making use of intermediate goods. I have less capital tied up in importing and reselling finished goods.

  2. Ed Hanson


    Remember 200 billion in tariffs is more than the total yearly trade in goods with China. Perhaps the rebound in stock prices which will happen today is a realization that China is running out of retaliatory response. Wait to see how much China is willing to hurt its economy attempting to defend it unfair and unfree trade policy.


  3. rtd

    Interesting post. Any thoughts on Gov Brainard’s comments regarding inversion: “there would probably be less adverse signal from any given yield curve spread.” Her point that this time may be different being due to lower yields on long-term securities relative to what we’ve seen historically from both a lower neutral rate and term premium. Brainard was stating that to movements in the yield curve should be taken in tandem with other macroeconomic conditions in consideration of the proper course of monetary policy. Obviously all data should be assessed, but with inversion being such a seemingly long leading indicator, the approach by Brainard to assess inversion within the context of other macro indicators seems a bit interesting. Also, doesn’t it seem that this time nearly always different?

    1. rtd

      I want to be clear:
      Given that Governor Brainard is a member of the BOG stationed in DC and the speech I’m referencing was given in NYC, this does NOT mean my comment was made in irony. Given the fact that you live in Wisconsin I do not assume that you believe monetary policy is trivial.

  4. Moses Herzog

    I don’t know what exactly these numbers are based on, but at a quick glance they seem to have some basis in reality, and since we love visual learning aids on this blog a lot, and I know commenter pgl is a WorldCup fan, I thought I would pass them on:

    Just on a passing note, there is a rumor going around that many ICE employees’ publicly available data has been made available online at certain web addresses. Now, I know some ICE employees have separated children from their parents and put those children in cages. I wonder why people would want data about those ICE workers???

    1. pgl

      Russia has 6 points in the 1st 2 games so they are a lock. Ronaldo scored his 4th goal and Portugal won getting up to 4 points. Spain v. Iran next.

      And of course I’m still elated that Mexico beat Germany!

      1. Moses Herzog

        Boo hiss!!!! Boo hiss!!!! I pull for both of those teams (Germany and Mexico), that’s a hard one for me. I’d rather see two teams like that face each other in later rounds. If you held a gun to my head to force me to choose one, I’d go with Germany, but I’m pretty neutral on that one.

  5. Ulenspiegel

    The legend of Fig. 1: “Ten year minus two year constant maturity Treasury yields (red), ”

    should be IMHO: …. yields (green),

    1. Moses Herzog

      @ dilbert dogbert
      Yeah, again, I’m not trying to make cheap shots, just observations. Well, really more my Dad’s observations about Japan that are reinforced by anyone who has gone there. Mainland Chinese would never never never do that—-unless they felt they had recently been “picked on” by media reports or something, and then they might do it to “save face”. But inherently, in a public place, Mainland Chinese would never. Now just as a sub-note here, I think Americans are often pigs in public places (though I would argue not to the degree mainland Chinese are). And would guess/wager Chinese are more clean in their personal homes and personal spaces than Americans are. What creates those cultural differences, I’m only throwing darts on that one.

      I’ve been at Chinese Universities that had to directly report to the Beijing government. What does that mean?? Most report to the provincial government, but if they have some “pet project” or policy thing, a University will directly report to Beijing. I would enter the campus from the back side and you would see two large garbage dumpsters with trash strewn about a quarter to a half of a block around the dumpster—food crap etc (don’t want to know) that had been setting off an odor out there forever. They would NEVER shut the top on the two dumpsters and every time the wind blew (this city was the correspondent of Chicago wind-wise) garbage went all over holy hell. There’s no way everyone at the University (including the Uni Pres) didn’t know that’s how it was. And NOBODY (but the foreigners, you know “the dirty laowai”) ever thought anything of it. As far as they were concerned, that quarter to half block of smelly trash was a tomato garden. I could tell you pretty much 3 books full of other things you would never believe. That was just to make the point with one of the more “believable” stories of my time there.

      I was there during the “bird flu” escapades (and the way the Chinese Gov handled ALL of it, it was indeed an escapade, believe me). Now if I went into detail on that one, Menzie and a good deal others here would be certain it was written in stone I’m racist. (If they don’t already). So you know, unless I get riled up, “not going there”.

      1. dilbert dogbert

        My reading said that the same public/private cultural behavior was common in Japan. Cultures change but it is also amazing how much they also stay the same.

        1. Moses Herzog

          @dilbert dogbert
          No personal offense meant—-But your “reading” is crap. Japanese are exceedingly more clean in public spaces than Mainland Chinese. To the point that I am not sure even a nationalistic Mainland Chinese would deny this fact after traveling to Japan. I’m sorry if that offends anyone, but this is reality. Remember we are speaking generalities here—NOT absolutes.

          And by the way, I will easily concede Japanese are also WAY cleaner than Americans in public spaces. This has nothing to do with “this” versus “that”. It’s reality. I’ve had many more mainland Chinese friends than Japanese friends, and even had a very negative/acidic confrontation with a Japanese neighbor in a dorm complex once, I have nearly zero reason to state that from bias.

  6. Moses Herzog

    Happy the site’s back up. For a few moments there, I thought maybe Menzie had outsourced his server to Platte River Networks and he was using a Microsoft product. Thank God Menzie’s too clever for that. Too bad that…….

    1. baffling

      perhaps it was the trump administration censoring the media? are black automobiles driven by guys in dark suits and sunglasses patrolling your neighborhood, menzie? you must be careful, or you will become a target as well. i say this half jokingly, just like trump’s comments about how the people should bow in his presence.

  7. Moses Herzog

    Thanks to James Hamilton and whoever else individuals worked to get the server back up. Next time don’t get your server from “Hillary’s Microsoft Antiques”. The place has a bad reputation and your emails could just “disappear”. It wasn’t Hillary’s fault though. She’s female, and we must treat her equally by being exceedingly gentle around her. Very very gentle and delicate or she’s not being treated equal. OK?? Remember that.

    The FBI forced Hillary to use a personal server. It was part of their secret “Patriarchy Forces Adult Female Yale Law Grad To Use Server” mission. Details of the secret FBI mission were uncovered by……. Hillary herself. Hillary has uploaded all the details of the secret FBI mission to this web address:

  8. Moses Herzog

    The great economics amalgamator , information merger, fusion samurai, coalescing dojo master, and not bad writer himself Mr Mark Thoma had problems with the comments section of his blog recently. It happens.

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