Abstract
The aim of this study is to test the ability of the yield curve on US government bonds to forecast the future evolution in the prices of commodities often used in as raw materials. We consider the monthly prices of nine commodities for more than 30 years. Our findings, confirmed by several parametric and non-parametric tests, are robust and indicate that the ability to forecast future performance changes over time. Specifically, between 1986 and the early 2000s the yield curve was quite successful in forecasting monthly changes in commodity prices, but that success diminished in the period following. One possible explanation for this outcome is the increased flow of capital into the commodity market resulting in stronger correlations with the equity markets and a breakdown of the obvious relationship between commodities and business cycle. Our findings are important for asset pricing, commodity traders and policy makers.
Highlights
The literature regards the term structure curve, which plots the yield of government bonds against their maturity, as an indicator with valuable information about the current and future states of the economy (e.g., Harvey 1989; Abdymomunov 2013; Gogas et al 2015; McMillan 2021b)
Our findings indicate that yield spreads are generally positively correlated with future changes in the price of commodities
Except for oil and palladium, we find that, when considering 1986–2003, the yield spread has a positive effect on the future prices of the rest of the commodities
Summary
The literature regards the term structure curve, which plots the yield of government bonds against their maturity, as an indicator with valuable information about the current and future states of the economy (e.g., Harvey 1989; Abdymomunov 2013; Gogas et al 2015; McMillan 2021b). Many studies, detailed in the literature review section, have demonstrated the ability of yield spreads to predict future economic situations effectively. They have established that the spreads contain a great deal of information about future economic activity and are accurate predictors of economic growth. There have been fewer comprehensive attempts to understand the dynamic relationships between the evolution in the prices of commodities and the shape of the yield curve. This question has become relevant in the wake of the unconventional monetary policy used in the last two decades, which has not been employed since the Great Depression during 1930s. We use various proxies for the yield spread combined from
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