The Yield Curve Is No Longer Inverted: Has The U.S. Economy Dodged The Recession Bullet?
Unfortunately, not yet. As we pointed out in a detailed interactive dashboard a couple of months ago, the Inverted Yield Curve is an important indicator of recession. But the yield curve has not always remained inverted before and during the recession. In a follow-up interactive dashboard, Trefis focuses on trends in the yield curve for the period between yield curve inversion and a recession, and finds that in the past the yield curve normalized several times before the onset of each of the last three recessions.
What is Yield Curve, and when does it become ‘Inverted’?
- The yield curve is a graph depicting yields on U.S. Treasury bonds at multiple maturities.
- Typically, it slopes upward, as short-term rates are lower than long-term rates as long-term investments attract additional risk premiums.
- An inverted yield curve is a situation in which long-term rates are lower than short-term rates – suggesting that markets expect a recession, which will reduce interest rates in the near- to -mid-term.
How Many Times Did The Yield Curve Normalize Before The Start Of Recession In The Past?
- As shown in the chart below, the number of yield curve ‘corrections’ have ranged from 0 to 8 in the last 5 recessions.
- Before the first two recessions, the yield curve remained inverted before the beginning of the recession.
- However, during the last 3 recessions, the yield curve corrected itself several times before the U.S. economy slumped into recession.
- The number was highest at 8 during the 2008 recession.
- Over recent months, the yield curve has corrected itself just once since the inversion.
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What Was The Duration Between The First Normalization And Beginning of Recession?
- The duration between the first yield curve normalization after it has inverted and the beginning of the recession (the ‘lag period’) has varied from 0 to more than 1000 days (33 months) in the last 5 recessions.
- During the first two recessions, there was no lag since the yield curve remained inverted before the recession.
- The lag was highest at over 1000 days during the 2001 crisis but was lower at 700 days before the 2008 recession.
For How Many Days During The Lag Period Was The Yield Curve Normal?
- The yield curve remained normal more than 50% of the times in each of the last 3 lags before the recession.
- The curve remained corrected for almost 65% of the time during the lag preceding the 2001 recession.
- However, the yield curve remained inverted for the entire period during the lag in the 1980 and 1981 recessions.
For How Many Days During The Recession Was The Yield Curve Normal?
- Interestingly, apart from the recessions that occurred in the 1980s, the yield curve remained normal 100% of the time during the time span of recessions.
Additional details about the number of days the yield curve remained normal during the 1980 and 1981 crisis are available in our interactive dashboard.
Conclusion: Inverted Yield Curve Normalizes Several Times Before The Onset Of The Recession
- The inverted yield has normalized each of the last 3 times before the recession.
- With the global economy becoming increasingly integrated and the federal banks across the globe cutting rates to revive the economy, the chances of normalization have increased considerably.
- Although the economy is not showing any clear signs of an impending recession yet, the U.S. economy is slowing down with a decline in trade and a contraction in manufacturing.
- If recessionary trends continue to grow more pronounced in the next months, there are chances that the yield curve may invert and then corrects itself several times before the economy goes into recession.
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