recession and the yield curve

[3/22/06] (Marty Zweig writes in the ZF annual report),

"Although much has been written about the relationship between the two-year note and the 10-year, we think it is more important to compare the 3-month yield to the 10-year yield. Right now they are about even. Historically, over the past 52 years when short rates have been 95% or more of the long rate (more would represent an inverted curve), the S&P has gone down approximately 11% on an annualized basis. When the short rate has been 95% or less than the long rate (less would be a relatively normal yield curve), the market has gone up almost 12%. This time the curve has inverted because the short rate has gone up while the long rate has been fairly flat. That seems a more neutral yield curve. However, if bond yields rise toward 5%, we’d start to get concerned."

[2/25/06] Mauldin presents a Fed paper which correlates the the yield curve spread and the probability of recession. With the current spread, the probability of a recession is 20%. However the spread figures to invert more negatively in the coming month.

"It is all but a foregone conclusion that the Fed will raise rates at its March meeting. If the ten year stays where it is, we will see a negative 27 basis point spread in the middle of March, which within 90 days would suggest a mid-30% chance of recession.

If the Fed raises again in May to 5%, without the ten year moving up, we would see a 40% chance of recession as the 90 day average would soon be a negative 50 basis points."

[2/28/06] Liz Ann Sonders writes much the same thing.