The Prediction of Economic Activity Growth by Sovereign Bond Spread in France, Germany and Great Britain
The Prediction of Economic Activity Growth by Sovereign Bond Spread in France, Germany and Great Britain

Author(s): Jana Hvozdenská
Subject(s): National Economy, Methodology and research technology, Policy, planning, forecast and speculation, Economic development, Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: bonds; slope; spread; yield curve;
Summary/Abstract: The steepness of the bond yield curve should be an excellent indicator of a possible future economic activity. A rise in the short rate tends to flatten the yield curve as well as to slow down real growth the near term. The relationship between the spread and future GDP activity was proved already before. One question remains – which spread is the best for the future prediction? Is it the spread between sovereign 10-year bonds and 3-month bonds or 30-year and 1- year or 10-year and 1-year sovereign bonds? This paper aims to analyze which spread is the most suitable for predicting of future economic growth in France, Germany and Great Britain between the years 2000 and 2016. The natural and probably the most popular measure of economic growth is GDP growth, taken quarterly. We have found out that the best predictive spreads in France, Germany and Great Britain are the spreads of 30-year and 1-year and 10-year and 1-year government bond yields. These findings might be beneficial for investors and provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity.

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