Yield Curve Moves to Record Spread: Economic Expansion in the Offing?

The spread between the 2-year and 10-year Treasury Note increased by 10 basis points today and has moved to a record high of 281 basis points. Historically, when this spread widens, the economy is expected to improve quickly in the future. Steep yield curves are normally seen at the beginning of an economic expansion after a recession. The weak economy and the Fed have depressed short-term interest rates; but intermediate rates begin to rise once the demand for capital is re-established by growing economic activity.

Unlike many sentiment indicators, the yield curve indicator has real money behind it and tends to be pretty accurate. If this indicator is correct, we will not have a double dip recession. Intermediate Bond funds have produced excellent performance but may be nearing a top. I have been cutting back on my fixed rate bond fund holdings and adding to my holdings of floating rate bond funds which benefit from rising intermediate bond rates.