Interpolated Yield Curve Forecast off Bloomberg Survey data

Each month Bloomberg surveys 60 to 70 economists to get their estimates of where Fed Funds, the 2-year Treasury, and the 10-year Treasury will be over the next several quarters. I take this data and interpolate for the points in between the survey data to create the attached report. This allows us to get a broad view of where various economists see interest rates going over the coming quarters.

The yield curve as forecast by the Bloomberg Survey has been getting steeper since January. The January report showed an absolute spread of 265 basis points between the average Fed Funds forecast and the average forecast for the 10 year Treasury for the 1Q 2010 period. The February report showed a spread of 290 basis points. This month they forecast a spread of 298 basis points for 1Q 2010 (10 yr forecast of 3.42% minus the Fed Fund forecast of 0.44%). The current Bloomberg Survey is forecasting a yield curve that is 12.5% steeper this month than the curve they forecast in January at the 1Q 2010 mark. The forecast for the 3Q 2010 yield curve steepened by 19% since January. This is no coincidence as we’ve had two months of massive government spending with signals that much more is to come. I don’t know how you could view the news and not conclude that inflation is soon to return. In fact it might be worth my time to dig into the details and find out if there are any individual analysts in the survey that forecast a flatter yield curve…that might be a good indicator of near term unemployment probability for economists.

So this month’s Interpolated Yield Curve is below (and attached in PDF format). At the bottom of the page I’ve attached the historical spread between Fed Funds and the 10 year Treasury going back to 1989. You’ll notice that the actual spread between these two points on the curve has been widening since the beginning of the year as well.

If you have any questions on this material please let me know.