A frequently overlooked part of the yield curve — the spread between the three-month Treasury rate one year forward and the spot three-month rate — is the most important, a team of strategists at Bank of America Merrill Lynch said on Friday.
This part of the curve, which has been inverted since March, dominates all other curves in its power to predict future growth in the US, they argue.
“The intuition behind why this particular slope works so well is simple: it purely reflects the market’s outlook for Fed policy and is impacted by very little else,” the strategists said in a client note.
They added: “Just as studies have shown that orange juice futures help predict Florida weather, the market’s pricing of Fed policy is a relatively good predictor of the year-ahead GDP growth.”
More at Business Insider