Charting the Course: Yield Curve Inversion – Predicting Recession?

In the financial markets, no indicator of an economic recession is as indicative of possible recession as the slope of the yield curve crossing into negative territory.

The first week of trading in December saw the much-awaited inversion of the yield curve, with the 5-year Treasury yield trading below the 2-year yield for the first time since June 2007. Another commonly cited yield curve measure, the spread between the 10-year and 2-year, has not yet moved into negative territory, but typically follows the 5-year and 2-year spread into inversion territory.

Historically, the yield curve has proved to be an accurate indicator of economic recessions. In the 1980s, early 1990s, early 2000s, and at the dawn of the Global Financial Crisis in 2006, the yield curve inverted in advance of a recession.

Source: Sage, Bloomberg as of 12/6/2018

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