Question: Does the term spread predict recessions? (Focus on the period from 1970 to the present.) How has the term spread evolved in the last year? Which components of the term spread are driving the evolution of the term spread over the last year? What does this predict for the U.S. economy? 

The term spread is the difference between a long-term interest rate (yield) and a short-term interest rate. This is a measure of the slope of the yield curve. For this assignment use the “market yield on U.S. Treasury securities at 10-year constant maturity” for the long rate and the “market yield on U.S. Treasury securities at 1-year constant maturity” for the short rate. The internet is full of information about the yield curve and its forecasting abilities.

We will define a recession according to the National Bureau of Economic Research’s official business cycle dates(https://www.nber.org/research/data/us-business-cyc….) Data on recessions are available in an excel file, but that file has an encoding issue. I have fixed the encoding issue and posted the file on the course webpage. A recession is the period between the peak and the trough. For example, the last recession went from February 2020 (the peak) to April 2020 (the trough). 

You can learn more about the yield curve, the term premium and economic growth at Fidelity: What is the yield curve?(https://www.fidelity.com/learning-center/investmen…)

Cleveland Fed: Does the yield curve signal recession? 

Where should I start? Try graphing the term spread and comparing it to the recession dates.

The details

Data: You can find data on the Treasury yields on FRED. Use the daily data. You are welcome to use other data or sources if you prefer but make sure they measure the same variables. You are welcome to use other data in your answer, as well. The data on business cycle dates is available on the course website.