THE RELATION BETWEEN DEFAULT-FREE INTEREST-RATES AND EXPECTED ECONOMIC-GROWTH IS STRONGER THAN YOU THINK

The relation between default-free interest rates and expected economic growth is substantially stronger than suggested by extant literature. Futures-implied Treasury bill yield spreads are more highly correlate d with future real consumption, investment, and GNP growth than spot s preads. This stronger relation arises because using futures removes a component of the spot term structure that covaries negatively with rea l economic growth. Treasury forward rates from spot bills contain a pr emium for the risk that short-sellers will default. This risk premium is negatively related to expected economic growth.