On page 341 of Book 2 Economics, CFA Level 1 Leading indicators #9 Interest rate spread between 10-year treasury yields and overnight borrowing rate (fed funds rate) Reason Because long-term yields express market expectations about the direction of short-term interest rates, and rates ultimately follow the economic cycle up and down, a wider spread, by anticipating short rate increases , also anticipates an economic upswing. Conversely, a narrower spread by anticipating _ short rate decreases _, also anticipates an economic downturn. Is a book or me wrong? From my understaning, Spread = Long rate ‐ Short rate Before recessions, the long rate dropped below the short rate. (short rate increases) which is opposite from what said in the book. please advise 
to tv.knight Question regarding Book2 Economics On page 341 of Book 2 Economics, CFA Level 1 Both are right (you and book). Long rate increases “by anticipating short rate increases” -> wider spread Long rate decreases “by anticipating short rate decreases” -> narrower spread If short rate is high you expect it will decrease -> decreasing long rate If short rate is low you expect it will increase -> increasing long rate
Think about pure expectation theory. If long term rates are above short term rates, short term rates are expected to go up in anticipation of economic upturn. http://www.forextraders.com/forex-analysis/forex-fundamental-analysis/pure-expectations-theory.html