inverted yield curve

The term "inverted yield curve" was coined by the Canadian economist Campbell Harvey in his 1986 PhD thesis at the University of Chicago.{{Cite web |last=Cox |first=Jeff |date=2019-10-08 |title=The father of the yield curve indicator says now is the time to prepare for a recession |url=https://www.cnbc.com/2019/10/08/inverted-yield-curve-guru-campbell-harvey-prepare-for-recession.html |access-date=2024-03-27 |website=CNBC |language=en}}

There are several explanations of why the yield curve becomes inverted. The "expectations theory" holds that long-term rates depicted in the yield curve are a reflection of expected future short-term rates,{{cite book |last1=Melicher |first1=Ronald |last2=Welshans |first2=Merle |title=Finance: Introduction to Markets, Institutions & Management |date=1988 |publisher=South-Western Publishing Co. |location=Cincinnati OH |isbn=0-538-06160-X |page=493 |edition=1988}} which in turn reflect expectations about future economic conditions and monetary policy. In this view, an inverted yield curve implies that investors expect lower interest rates at some point in the future {{Ndash}}for example, when the economy is expected to enter a recession and the Federal Reserve reduces interest rates to stimulate the economy and pull it out of recession. In that scenario, expected future short-term rates fall below current short-term rates, and the yield curve inverts.{{cite book |last1=Thau |first1=Annette |title=The Bond Book |date=2001 |publisher=McGraw Hill |location=New York |isbn=0-07-135862-5 |page=86 |edition=Second}}

A related explanation holds that when investors who value interest income expect recession, a shift in Federal Reserve policy and lower interest rates, they try to lock in long-term yields to protect their income stream. The resulting demand for longer-term bonds drives up their prices, reducing long-term yields.{{rp|87}}

{{see also|Criticism of the Federal Reserve|Quantitative easing|Quantitative tightening}}

The inverted yield curve is the contraction phase in the Business cycle or Credit cycle when the federal funds rate and treasury interest rates are high to create a hard or soft landing in the cycle. When the Federal funds rate and interest rates are lowered after the economic contraction (to get price and commodity stabilization) this is the growth and expansion phase in the business cycle. The Federal Reserve only indirectly controls the money supply and it is the banks themselves that create new money when they make loans (Debt based monetary system). By manipulating interest rates with the Federal funds rate and Repurchase agreement (Repo Market) the Fed tries to control how much new money banks create.{{cite web | url=https://mises.org/wire/here-we-go-again-fed-causing-another-recession | title=Here We Go Again: The Fed is Causing Another Recession | date=21 June 2022 }}{{cite web | url=https://www.newyorkfed.org/markets/reference-rates | title=Reference Rates - FEDERAL RESERVE BANK of NEW YORK }}

It has often been said that the inverted yield curve has been one of the most reliable leading indicators for economic recession during the post–World War II era. Proponents of this position maintain that inversion tends to predate a recession 7 to 24 months in advance.{{rp|318}}{{cite web |last1=Rosenberg |first1=Joshua |last2=Maurer |first2=Samuel |title=Signal or Noise? Implications of the Term Premium for Recession Forecasting |url=https://www.newyorkfed.org/research/epr/08v14n1/0807rose.html |publisher=Federal Reserve Bank of New York |access-date=27 May 2023}}{{cite web |last1=Campbell |first1=Harvey R. |title=Yield Curve Inversions and Future Economic Growth |url=https://faculty.fuqua.duke.edu/~charvey/Research/Professional_Materials/Term_Structure_May_17_2011.pdf |publisher=Duke University |access-date=29 May 2023}}{{Cite web|url=https://www.investopedia.com/terms/i/invertedyieldcurve.asp|title=What Is an Inverted Yield Curve?|website=Investopedia.com}}{{Cite web|url=https://ig.ft.com/the-yield-curve-explained/|title=An inverted yield curve: why investors are watching closely|first1=Chelsea|last1=Bruce-Lockhart|first2=Emma|last2=Lewis|first3=Tommy|last3=Stubbington|website=Ig.ft.com|date=6 April 2022 }}{{cite journal | url=https://www.tandfonline.com/doi/full/10.1080/03610926.2023.2232908 | doi=10.1080/03610926.2023.2232908 | title=How many times until a coincidence becomes a pattern? The case of yield curve inversions preceding recessions and the magical number 7 | date=2023 | last1=Kock | first1=Ned | last2=Tarkom | first2=Augustine | journal=Communications in Statistics - Theory and Methods | volume=53 | issue=16 | pages=5785–5792 | url-access=subscription }} Others are skeptical, for example stating that the inverted yield curve is "not necessarily" a reliable metric for predicting recession, or that it has predicted "nine of the past five" recessions.{{rp|86}}{{cite journal |last1=Andolfatto |first1=David |last2=Spewack |first2=Andrew |title=Does the Yield Curve Really Forecast Recession? |url=https://research.stlouisfed.org/publications/economic-synopses/2018/11/30/does-the-yield-curve-really-forecast-recession/ |journal=Economic Synopses |year=2018 |volume=2018 |issue=30 |doi=10.20955/es.2018.30 |s2cid=158795961 |access-date=27 May 2023|doi-access=free }}

In 2023, inversion during a labor shortage and low indebtedness raised questions over whether widespread awareness of its predictive power made it less predictive.{{cite web |url=https://www.npr.org/2023/04/14/1170170563/an-indicator-that-often-points-to-recession-could-be-giving-a-false-signal-this- |title=An indicator that often points to recession could be giving a false signal this time |date=April 14, 2023 |publisher=All Things Considered |author1=Darian Woods |author2=Adrian Ma}}

The longest and deepest Treasury yield curve inversion in history began in July 2022, as the Federal Reserve sharply increased the fed funds rate to combat the 2021–2023 inflation surge. Despite widespread predictions by economists and market analysts of an imminent recession, none had materialized by July 2024, economic growth remained steady, and a Reuters survey of economists that month found they expected the economy to continue growing for the next two years. An earlier survey of bond market strategists found a majority no longer believed an inverted curve to be a reliable recession predictor. The curve began re-steepening toward positive territory in June 2024, as it had at other points during that inversion; in every previous inversion they examined, Deutsche Bank analysts found the curve had re-steepened before a recession began.{{cite news |last1=Peck |first1=Emily |title=Why everyone was so wrong about the 2023 economy |url=https://www.axios.com/2023/12/22/2023-economy-predictions-wrong-recession |work=Axios |date=December 22, 2023}}{{cite news |last1=Barbuscia |first1=Davide |title=US yield curve nears flip with jury out on recession signal |url=https://www.reuters.com/markets/rates-bonds/us-yield-curve-nears-flip-with-jury-out-recession-signal-2024-07-29/#:~:text=%22Right%20now%2C%20as%20the%20yield,previous%20inversion%20record%20from%201978. |publisher=Reuters |date=July 29, 2024}}{{cite news |title=10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity |url=https://fred.stlouisfed.org/series/T10Y2Y |publisher=Federal Reserve Economic Data}}

{{see also|Turkish economic crisis (2018–current)}}

• Austrian business cycle theory
• Friedman's k-percent rule
• Zero interest-rate policy
• 1970s commodities boom
• 2000s commodities boom
• 2020s commodities boom
• Sahm rule - Economic indicator predicting recessions
• Yield curve control
• Taylor rule

{{reflist}}

{{Commons category|Inverted yield curve}}

• [https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202305 Daily yield curve data.] U.S. Department of the Treasury.
• [https://fred.stlouisfed.org/series/T10Y2Y Daily yield spread data: 10-year vs. 2-year Treasury securities.] Federal Reserve Bank of St. Louis.
• [https://www.newyorkfed.org/markets/reference-rates Reference Rates]. Federal Reserve Bank of New York.
• [https://mises.org/wire/here-we-go-again-fed-causing-another-recession Here We Go Again: The Fed Is Causing Another Recession]. Mises Institute. June 21, 2022.

{{United States – Commonwealth of Nations recessions}}

Category:Economics curves

Category:Bond valuation

Category:Yield (finance)

Category:Public finance

Category:Government finances in the United States

Category:Government bonds issued by the United States

Category:Government bonds