What Does a Yield Curve Have to Do with a Recession?
- The yield curve – and a potential inversion in the yield curve – has been the subject of much concern in the markets recently and caused a sharp sell-off this past Tuesday.
- An inverted yield curve, defined broadly as short-term bonds paying more than long-term bonds, can signal that growth may be slowing after having peaked, but doesn’t necessarily mean a recession or market crash is imminent.
- Most recessions in modern history have been preceded by an inverted yield curve. However, there have been false positive in the past where inversions did not result in a recession. In addition, according to the Schwab Center for Financial Research, the lag times between an inversion and a subsequent recession have been long and highly variable – anywhere from a few months to more than two years. As such, an inversion is certainly not the best timing indicator for a recession.