Bond and stock traders track the spread, or difference, in yield between the 2–year U.S. Treasury note and the 10–year Treasury note because the spread represents fixed–income traders’ expectations about the direction of Fed monetary policy, as well as inflationary expectations in the economy.

Equity traders take into account both these concerns when making decisions about the stock market’s outlook. To see if this perceived connection is valid, the following study shows the results of comparing monthly changes in the 2– year/10–year T–note spread to changes in the S&P 500 index at one–, three–, and six–month intervals. The review period was January 1984 to September 2005.