The premium of 10-year Treasury bond yields over 2-year Treasury yields has risen to a record high, and CNBC commentator Larry Kudlow says that’s a good thing.
“When the (yield) curve is wide and upward sloping, as it is today, it tells us that the economic future is good,” he wrote on CNBC.com.
“The yield curve may be the best single forecasting predictor there is.”
The yield curve consists of the yields of Treasuries with all different maturities. Thus, a steep yield curve occurs when the 10-year Treasury yield is much higher than the two-year yield. An inverted curve would occur when the two-year yield is higher than the 10-year yield.
For most of the period between 2006 and early 2008, the yield curve was flat or inverted, Kudlow notes. So it accurately forecast the doom to come.
“Right now it is forecasting a much stronger economy in 2010 than most people think possible,” he wrote.
“So there could be a mini boom next year, with real GDP growing at 4 to 5 percent, perhaps with a 6 percent quarter in there someplace. And the unemployment rate is likely to come down, perhaps moving into the 8 percent zone from today’s 10 percent.”
Kudlow also thinks the threat of rampant inflation is dissipating. “My hunch is that inflation will range 2 to 3 percent next year,” he wrote.
Some other experts aren’t so sanguine about the steep yield curve’s implications for inflation.
“If you are going to have a recovery, you are going to have higher inflationary pressures, so the curve should continue to steepen from here,” Dan Greenhaus, chief economic strategist at Miller Tabak, told Bloomberg.
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