The relationship of bond yield curves and gross domestic product growth in Scandinavia
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Abstract
The steepness of the bond yield curve is an excellent indicator of a possible future economic activity. A rise in the short rate tends to flatten the yield curve and slows down real growth in the near-term. This paper analyses the dependence between slope of the yield curve and an economic activity of selected countries between 2000 and 2016. The slope of the yield curve can be measured as the yield spread between sovereign 10-year and 3-month bonds. The results showed that the best predictive lags are the lag of four and five quarters. The results also confirm that 10-year and 3-month yield spread has a significant predictive power for real GDP growth after a financial crisis. These findings can benefit investors and provide evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity.
Keywords: GDP prediction, yield curve, slope, spread.
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