June 9, 2005
RESEARCH ROOM UPDATE
John Hussman, manager of the Hussman Strategic Growth Fund, weighs the odds of what some say is an approaching recession. He lays out his case in a new essay published earlier this week, and now noted in the CS Research Room.
Posted by jp at June 9, 2005 6:59 PM
Hussman goes into detail about interest rate spreads and other matters in his economic primer, which by the way is referenced (with a link) in the Research Room piece. Here's an excerpt:
1) The "credit spread" between corporate securities and default-free Treasury securities becomes wider than it was 6 months earlier. This spread is measured by the difference between 10-year corporate bond yields and 10-year U.S. Treasury bond yields (or alternatively, by 6-month commercial paper minus 6- month U.S. Treasury bill yields). This spread is primarily an indication of market perceptions regarding earnings risk and default risk, which generally rises during recessions.
2) The "maturity spread" between long-term and short-term interest rates falls to less than 2.5%, as measured by the difference between the 10-year Treasury bond yield and the 3-month Treasury bill yield. A narrow difference between these interest rates indicates that the financial markets expect slower economic growth ahead. If the other indicators are unfavorable, anything less than a very wide maturity spread indicates serious trouble, regardless of unemployment, inflation, or other data.
Hussman's full primer on economics is available at: www.hussmanfunds.com/html/economy.htm
Posted by: JP at June 10, 2005 2:34 PM
I'm wondering whether Mr. Hussman could define credit sreads for us and how he measures such data.
Posted by: Gerald Eddy at June 10, 2005 11:31 AM