Bond Yields and Yield-Curve Models: A 2008 Perspective

For whatever they are worth, here are some Treasury and corporate bond models, and two flavors of the U.S. yield curve, plus a chart of the U.S. GDP's correlation with U.S. yield curves. Some of the models' projections may be counter-intuitive, but taken together, what these models indicate make sense.

The U.S. 10-yr Bond Yield Model: shows an uptick in yields during the first quarter of 2008, then declines into the 3rd quarter, after which a pullback (rise) in the yield. Risks for further declines in yield may arise towards year-end.




Fed Funds-10yr Yield Curve: shows the yield curve may steepen well into the middle of the year, and flattens thereafter.




2yr-10yr yield curve: shows the yield curve steepening well into the middle of the year.




BAA Corp Yield-10yr Treasury yield: suggests further spread widening into the first quarter of the year, but followed by sharp narrowing of the spread until the third quarter of 2008.




The U.S. GDP and Yield Curve evolution: the correlation chart suggests the U.S. GDP may be biased downwards well into the year-end, but should post strong recovery during the first quarter of 2009.