Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 26P
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Question
![The subsequent figures show the evolution of the spread between the 10-Year Treasury
Constant Maturity and the 2-Year Treasury Constant Maturity. Apparently this spread turns
negative before a recession (Figure 1). As becomes apparent the spread become negative
during the year 2019 again (Figure 2).
FRED- 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity
30
25
20
13
10
10
2000
2002
2004
2000
2010
2012
Snaded areas indicate U.S. recessions
Source: Federal Reserve Bank of St. Louis
red.stiouisfed.org
Figure 1: 10-Year Treasury Constant Maturity minus the 2-Year Treasury Constant
Maturity for the time period 2000-2012
Percent](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F52454c6f-6e48-44f3-93c8-66794e5d29c7%2Fb47efbef-c279-4f06-ba87-4ad4eaf17f7b%2Fpa1s0kb_processed.jpeg&w=3840&q=75)
Transcribed Image Text:The subsequent figures show the evolution of the spread between the 10-Year Treasury
Constant Maturity and the 2-Year Treasury Constant Maturity. Apparently this spread turns
negative before a recession (Figure 1). As becomes apparent the spread become negative
during the year 2019 again (Figure 2).
FRED- 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity
30
25
20
13
10
10
2000
2002
2004
2000
2010
2012
Snaded areas indicate U.S. recessions
Source: Federal Reserve Bank of St. Louis
red.stiouisfed.org
Figure 1: 10-Year Treasury Constant Maturity minus the 2-Year Treasury Constant
Maturity for the time period 2000-2012
Percent
![FRED - 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity
30
20
15
10
10
2015-01
2015-07
2016-01
2010-07
2017-01 2017-07
2013-01
201807 2019-01
201907
Shaded areas indicate US. recessions
Source Federal Reserve Bank of St. Louis
fred. stiouisfed.org
Figure 2: 10-Year Treasury Constant Maturity minus the 2-Year Treasury Constant
Maturity for the time period 01/2015-09/2019
Having considered the scenario above complete the following tasks:
a) What does this negative spread imply for the yield curve? Give reasons for
a negative spread ahead of a recession (-
b) Some economists argue that the yield curve and the signals it sends out
have been distorted by central banks' interventions in the aftermath of the
financial crisis. Analyse this statement critically (r-
Percent](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F52454c6f-6e48-44f3-93c8-66794e5d29c7%2Fb47efbef-c279-4f06-ba87-4ad4eaf17f7b%2Fko487on_processed.jpeg&w=3840&q=75)
Transcribed Image Text:FRED - 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity
30
20
15
10
10
2015-01
2015-07
2016-01
2010-07
2017-01 2017-07
2013-01
201807 2019-01
201907
Shaded areas indicate US. recessions
Source Federal Reserve Bank of St. Louis
fred. stiouisfed.org
Figure 2: 10-Year Treasury Constant Maturity minus the 2-Year Treasury Constant
Maturity for the time period 01/2015-09/2019
Having considered the scenario above complete the following tasks:
a) What does this negative spread imply for the yield curve? Give reasons for
a negative spread ahead of a recession (-
b) Some economists argue that the yield curve and the signals it sends out
have been distorted by central banks' interventions in the aftermath of the
financial crisis. Analyse this statement critically (r-
Percent
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