Yield Curve Inversion: Recession Confirmed?

The yield on 3-month notes surpassed 10-year bonds on Oct. 18, 2022, according to the U.S. Treasury. Analysts say it's a hint of a U.S. recession in 6 to 18 months.

The U.S. yield curve depicts interest rates on government debt as maturity lengthens. Longer-term U.S. debt carries a higher interest rate than shorter.

Yield Curve Inversion

The 3-month rate surpassed the 10-year rate for the first time since Covid-19. This adjustment may reverse the U.S. yield curve, signaling a recession.

Yield Curve Trends in 2022

The difference between the 10-year and 3-month rates is one of the greatest methods to predict an economic slowdown, according to New York Fed researchers.

Proof

Inverted yield curves may be able to predict things, even if they don't foretell recessions.

Why This Indicator Has Worked

The yield curve inverted in 2022 because the Fed raised short-term interest rates. Raising interest rates tends to stall the economy and cause a recession.

The Federal Reserve

With a rising yield curve, banks can earn more income when lending for long-term projects like building a new factory.

Banks

Yield curve inversion has predicted recessions since the 1980s. You can find misleading signs further back, and recessions are rare.

The Risks

Yield curve timing is difficult. Recession fears are one cause for the current bear market.

Market Timing

Yield curve indicator attention is also interesting. Yield-curve inversion may influence Fed and market choices. 

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