Chart of the Week: Yield Curve (10 Year/Fed Funds) vs. Unemployment Less Inflation

Fascinating study via Spencer England’s Equity Review: The
Yield Curve tends to flip negative whenever Inflation exceeds

Yield Curve (10 Year/Fed Funds) vs. Unemployment Less Inflation
click for larger chart


Source: Spencer
England’s Equity Review

The bold red line represents the Yield Curve, while the
thinner line is the remainder of Unemployment once Inflation is subtracted.


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What's been said:

Discussions found on the web:
  1. anne commented on Apr 25

    Please do explain. What conclusion should I draw?

  2. Barry Ritholtz commented on Apr 26

    Dunno — I just thought it was an unusual and intriguing analysis.

    Spencer, do you want to elucidate on what this chart means?

  3. spencer commented on Apr 26

    Sorry, I have been on the road .

    It is a forecasting tool. Plug in your expectations for unemployment, inflation and fed funds and it will generate a long bond yield. If a year from now the unemployment rate is 5%, inflation is 3.5% and fed funds are at 4.0 % the 10 year bond should be at 5.5%.(4.0 + (5-3.5)).

    Plug in your own numbers.

    But the main point the chart really makes is that the shape of the yield curve is not unusual. Everyone talks about how the long bond has eased while the Fed tightened over the past year as if it is some mysterious conundrum. But it isn’t — the equation implies that the drop in long bond yields over the past year is exactly what one should have expected.

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