For decades, one of the most accurate measures for predicting a recession has been when short-term yields on Treasuries exceed those of the longer-term bonds. Many believe the yield curve is a reliable indicator of an upcoming economic downturn. This is becasue the short-term side of the yield curve is mainly driven by Federal Reserve policy that refleccts current economic strength; the long-term side of the yield curve—10-year and longer matiurity Treasuries, by comparison, is thought to indicate bond investors’ long-term views of the market as well as inflation expectations.
An inverted yield curve has preceded each of the last seven recessions as measured by the National Bureau of Eonomic Research.
As such, whenever the dreaded inverted yield curve rears it’s ugly head, investors understandably start to panic. Over the past year, the yield curve has inverted several times — albeit for very shot durations. Is a recession imminent if the curve inverts for a few days? Is there a minimum duration for which the yield curve must be inverted prior to a subsequent recession, that may follow anywhere between a few months to two years.
What part of the yield curve one looks at matters as well: is the comparison between the three-month bill and 10 year note the definitive standard to