In this post, I want to focus in on the NGDP growth and bond-yield correlation. David Beckworth offers pretty convincing evidence that bond yields are highly correlated with NGDP growth forecasts:
Forecasting can be a bit inaccurate, so Lars Christensen has a very nice graph showing how the 10 year bond yield has been tightly coupled with the year to year growth in NGDP in any given year.
On the graph in the second half of the 1970's (which would have been the correlations between the data from 1970 to 1985 on the NGDP growth from 1980 to 1995), we can see that there is actually a negative correlation between the bond yield and NGDP growth. This likely could have been the result of tightening by the Federal Reserve in the 1980's in response to the oil shocks. As a result, NGDP was pushed down against expectations, thereby creating a negative correlation. The correlation is stronger in recent times, as the 1997 data point includes data from 2012, but still the correlation is not as strong as the one Beckworth and others find for forecasters.
Another interesting point to note in recent times is that although the correlation between NGDP growth and bond yield has been fairly high, , the OLS coefficient is rather low. Bond yield does predict NGDP growth, but not in a one-to-one relationship. In the most recent window, a 1% increase in bond yield predicted a 0.47% increase in NGDP growth. What's interesting about the OLS coefficient that the correlation hides is that the OLS coefficient has been increasing in recent history. I'm still not quite sure what that means, but I feel it should have important implications for the safe assets hypothesis and expectations of future economic growth.