What is Yield Curve, and when does it become 'Inverted'?
The yield curve is a graph depicting yields on U.S. Treasury bonds at multiple maturities. Typically, it slopes upward, as short-term rates are lower than long-term rates, as long-term investments attract additional risk premiums.
An inverted yield curve is a situation in which long-term rates are lower than short-term rates - suggesting that markets expect a recession, which will reduce interest rates in the near- to mid-term.
As shown in the chart, on August 27, 2019, the yield curve was inverted as short term interest rates (1 and 2 month maturity) were higher than the long term rates (36-84 month maturity).
Inverted Yield Curve is an important indicator of recession but the curve has not always remained inverted before and during the recession.
In this dashboard we analyze how many times the inverted yield curve has corrected itself (ceases to be inverted) before the recession and after how long a recession follows the correction.
What Was The Duration Between The First Normalization And Beginning of Recession?
Duration Between First Normalization And Beginning of Recession
The duration between the first yield curve normalization after it has inverted and the beginning of recession (the 'lag period') has varied from 0 to more than 1000 days (33 months) in the last 5 recessions.
During the first two recessions, there was no lag since the yield curve remained inverted before the recession.
The lag was highest at over 1000 days during the 2001 crisis but was lower at 700 days in the most recent one.
For How Many Days During The Lag Period Was The Yield Curve Normal?
% Of Lag Period When Yield Curve Was Normal [A/B]
Days During Lag When Yield Curve Was Normal [A]
Time Lag Between First Correction And Beginning of Recession [B]
The yield curve remained normal more than 50% of the times in each of the last 3 lags before the recession.
The curve remained corrected for almost 65% of the time during the lag preceding the 2001 recession.
However, the yield curve remained inverted for the entire period during the lag in the 1980 and 1981 recessions.
Conclusion: Inverted Yield Curve Normalizes Several Times Before The Onset Of The Recession
The inverted yield has normalized each of the last 3 time before the recession.With the global economy becoming increasingly integrated and the federal banks across the globe cutting rates to revive the economy, the chances of normalization have increased considerably
.Although the economy is not showing any clear signs of an impending recession yet, the U.S. economy is slowing down with a decline in trade and a contraction in manufacturing.If recessionary trends continue to grow more pronounced in the next months, there are chances that the yield curve may invert and then corrects itself several times before the economy goes into recession.