The FRED® Blog

Dating the financial crisis using fixed income market yield spreads

How would you answer the question, “When did the Great Financial Crisis begin?” Some date the beginning of the crisis according to the events surrounding the failure of Lehman Brothers in mid-September 2008. But at that point, financial markets had already been in turmoil for more than a year, as certain time series from the summer of 2007 show. So how do you date the crisis?

One way to date the recent financial crisis is to identify significant breaks in the dynamics of yield spreads from U.S. fixed income markets (thought to be at the core of the crisis) using appropriate statistical techniques, like I do in a forthcoming article (working paper version) along with coauthors Massimo Guidolin and Pierangelo De Pace. With a particular definition of financial crisis in mind, this procedure allows us to identify the weeks of August 3, 2007, and June 26, 2009, as the beginning and the end of the crisis, at least from the perspective of fixed income yield spreads.

While some of the spreads we use are based on proprietary data, several can be constructed from FRED data. In the graph, we plot the spread between Moody’s seasoned Aaa corporate bond yield and Moody’s seasoned Baa corporate bond yield, as well as the spread between the 30-year fixed-rate mortgage average in the United States and the 30-year Treasury constant maturity rate.

Even just eyeballing the graph gives a sense of the degree of comovement of these spreads at least for the period beginning in 2007. Moreover, the spreads show an upward shift in their level approximately in the second half of 2007 as well as a downward shift approximately in mid-2009.

How this graph was created: In FRED, enter “Moody’s” in the search box. This will return a few Moody’s series: I first selected the Baa corporate bond yield and then added the Aaa corporate bond yield. The spread is then the difference between the two: a-b. A similar transformation was applied to the 30-year Treasury constant maturity rate and the 30-year fixed-rate mortgage average in the United States.

Suggested by Silvio Contessi

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