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Answer: Narrows when the market anticipates an economic downturn.
The correct answer is **B** because the interest rate spread between long-term and short-term rates reflects market expectations about future economic conditions. A narrower spread indicates anticipation of lower short-term rates, which typically aligns with expectations of an economic downturn. Conversely, a wider spread suggests expectations of higher short-term rates and an economic upswing. This makes the spread a leading economic indicator, not a lagging one (A is incorrect). Option C is incorrect because the spread widens when short-term rates are expected to rise, not decline.
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The interest rate spread between 10-year Treasury yields and overnight borrowing rates most likely:
A
Acts as a lagging economic indicator.
B
Narrows when the market anticipates an economic downturn.
C
Widens as the market expects future short-term interest rates to decline.
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