By Rahul Karunakar
The spread between 2- and 10-year U.S. Treasury yields will shrink to 180 basis points in a year according to the latest Reuters bonds poll – the narrowest margin since August 2008, the month before Lehman Brothers collapsed.
Historically, that spread has been a key indication of what investors and traders are thinking about the economy’s prospects: the narrower it gets, certainly with short-term rates already at rock bottom, the darker the outlook.
It wasn’t looking particularly good in August 2008, and of course we all know what happened the following month: the start of an epic financial and economic crisis the world is still struggling to shake off.
A narrowing spread, driven by long-dated yields falling, might be welcomed by central banks who are aiming to bring them down to stimulate growth. But it’s also a dark sign for what people broadly feel is going to happen in the economy.
Said John Silvia, chief economist at Wells Fargo:
“I don’t think it is good news. It just tells you that the overall expectation for growth in the U.S. is weaker over time.”