Using the US Yield Curve Inversion to Predict Recessions. If you click on the year, the pop-up window will list the 10 years for the current decade, allowing you to select the desired year more easily. And there was also one case when the yield curve did not invert, the recession of 1960-1961. That does not appear to be the case at this time. Please examine the next two charts. They might be the most valuable charts you will see in the foreseeable future, so look carefully. It might be, of course, the case that this time will be different. Members Only. Our data series goes back to 1953 – since then, we had eight yield curve inversions and almost all of them were followed by a recession. The yield curve is not an ideal recessionary indicator. The red line is the Yield Curve. When you read these words, the Fed has probably just cut interest rates, “just in case”. It means that the odds of a recession have increased compared to the last month. Table 1: U.S. yield curve inversions and recessions. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. Normally, the curve slopes upward somewhat steeply. However, the yield curve can sometimes become flat or inverted. Click on the “Pause” ( ▌▌) button to stop the yellow line. For example, click on the “Jan” item in the rightmost image of Figure 10 to add the yield curve for January 2017. The only exception was September 1966. 5 things investors need to know about an inverted yield curve Published: Aug. 28, 2019 at 9:43 a.m. As of August 7, 2019, the yield curve was clearly in inversion in several factors. Now that we've established that yield-curve inversions are a warning sign for oncoming recessions, and that the average lead time is 14 months, what can we do with this information? This chart shows why everyone on Wall Street is so worried about the yield curve Published Sat, Jun 15 2019 8:30 AM EDT Updated Sat, Jun 15 2019 8:31 AM EDT Yun Li @YunLi626 You can remove a yield curve from the chart by clicking on the desired year from the legend. Yields are interpolated by the Treasury from the daily yield curve. Treasury Yield Curve Rates: These rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Monday's Charts for Gold, Silver and Platinum and Palladium, Jan. 11, Where are the stops? Yield curve in the U.S. 2006-2019 Yield on ten-year government bonds of selected countries 2020 Monthly yield on ten-year government bonds in Luxembourg 2000-2020 It shows the U.S. Treasury yield curve, or actually not the whole curve, but the spread between 10-year and 3-month government bonds. However, recent experience in the United Kingdom and Australia raises questions as to whether this relationship still applies: both economies have coped with inverted yield curves for some time while enjoying robust growth. Hence, although we put question marks in the table at these two cases, the predictive power of the inversion of the yield curve remains, at least historically speaking, very powerful. Historical 10Y-2Y Spread on Treasury Yield, Historical Treasury Yield vs. S&P 500 P/E. Negative yield curves have proved to be reliable predictors of economic recession over the past 50 years. Watch the Yield Curve. Two important levels in both models – 30 and 40 percent, respectively – were exceeded, so we feel obliged to warn again our Readers that there are high chances, or even very high chances right now, of the U.S. recession arriving somewhere around the second quarter of 2020. Chart 3: Yield curve-derived recession probabilities twelve months ahead (calculated by the New York Fed, in %) from January 1960 to June 2020. Due to this, a normal yield curve reflects increasing bond yields as maturity increases. An inverted yield curve reflects decreasing bond yields as maturity increases. In a flat yield curve, short-term bonds have approximately the same yield as long-term bonds. The chart on the right graphs the historical spread between the 10-year bond yield and the one-year bond yield. Mind the yield curve. As a refresher, please take a look at the chart below. Click on the “<<” to view the previous year or “>>” to view the next year. How I Learned to Stop Worrying and Trust the Yield Curve. This week, the US 10-year Treasury yield sank to new 52-week lows and sliced through some important support levels. If you look carefully at the historical spread chart (see Figure 6) or the interactive chart (see Figure 7), you will notice gray bars throughout the charts. Inversion of the yield curve is worrisome when interest rates across the entire curve are rising as a result of an overheated economy. We keep our promises. Treasury Yield Curve” item under the “Market” tab. If the inversion is large or sustained, a rising unemployment rate is likely to follow. Wyckoff, Where Are the Stops - Jim Figure 2 shows a flat yield curve while Figure 3 shows an inverted yield curve. It means that the yield curve remains inverted (on a daily basis) since May 2019 (we abstract from the short-lived dip in March 2019). The yield curve inverted, but no officially-declared recession took place. Clicking on the decade allows you to select a different decade from the current century. You can add the yield curve for a specific month by clicking on the desired month. An inverted yield curve likely signals that monetary policy has become quite restrictive—perhaps because policymakers feel they need to push hard on the brake pedal to hold inflation in check. Chart 2: Yield curve (spread between US 10-year and 3-month Treasuries, monthly averages, data retrieved from the New York Fed, in %) in 2019. Explain why the curve inverts. Chart 1: Yield curve (spread between US 10-year and 3-month Treasuries, daily numbers, in %) in 2019. Prior to the March 2001 recession start, there were two yield curve inversions: A brief and shallow event in 1998 (false alarm) and one long and sharp inversion in early 2000. © 2004-2021 GuruFocus.com, LLC. In the previous edition of the Market Overview, we promised our Readers to “dig even deeper into the predictive power of the yield curve”. 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