Spread position as a leading economic indicator

Yield spreads are closely linked to economic activity. Using positions data on bond futures, I document that speculators’ steepening positions are associated with higher recession probabilities and lower payroll growths in subsequent months. I attribute the predictive power to speculators’ superior payroll expectations because their spread positions are aligned with subsequent payroll surprises. Steepening positions are also likely to be followed by lower short-term yields and steeper yield curves, suggesting that the positions are associated with an expectation of low economic activities. Overall, speculators’ spread positions can be useful as a leading economic indicator as they contain information about future economic activity.