Jun

11

Wall Street’s Favorite Recession Indicator Is in a Slump of Its Own
Treasury yields have been inverted for the longest stretch on record

One of Wall Street’s favorite recession indicators looks broken. An anomaly known as an inverted yield curve, in which yields on short-term Treasurys exceed those of longer-term government debt, has long been taken as a nearly surefire signal that an economic pullback looms. In each of the previous eight U.S. downturns, that has happened before the economy sputtered. There haven’t been any glaring false alarms.

Now, though, that streak is threatened. The yield curve has been inverted for a record stretch—around 400 trading sessions or more by some measures—with no signs of a major slowdown. U.S. employers added a solid 175,000 jobs last month, and economic growth this quarter is expected to pick up from earlier in the year.

Big Al snarks:

If a recession doesn’t materialize soon, it could do lasting damage to the yield curve’s status as a warning system.

I'd hate to have to spend my day thinking up stuff like that.

Larry Williams writes:

A close up study of it shows it has often been way wrong—this is just one more time.

Nils Poertner comments:

As those "indicators" lose their importance, the more ppl (and WSJ and FT in particular!!) talk about it. "get the joke" Lack would have said.

Jeffrey Hirsch responds:

NBER that said 2020 was a recession. Fed started cutting rates in 2019 and the curve inverted then.

The recession lasted two months, which makes it the shortest US recession on record.

It is just a shame bond market traders didn’t tell the rest of us that covid was coming. And what about the 2 back-to-back negative quarters of GDP in Q1&2 of 2022? That looked like a recession as well IMHO.

Big Al adds:

The Fed (from before the GFC) says levels matter, too:

The Yield Curve and Predicting Recessions
Jonathan H. Wright, Federal Reserve Board, Washington DC
February 2006

Abstract:

The slope of the Treasury yield curve has often been cited as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. In this paper, I consider a number of probit models using the yield curve to forecast recessions. Models that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone. There is some evidence that controlling for a term premium proxy as well may also help. I discuss the implications of the current shape of the yield curve in the light of these results, and report results of some tests for structural stability and an evaluation of out-of-sample predictive performance.


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