Yield Curve Inversions and Recessions
by Ron Griess
Proprietor, The Chart Store
www.thechartstore.com
February 24, 2006

~ From The Chart Store Weekly Blog, February 10, 2006 ~

The financial press continues to chatter about the yield curve inverting. We decided to do our own little study to see what the record shows. Here's what we use for our study and the charts that follow:

• We calculate the daily yield spread between the "target rate" and the spectrum of U.S. Treasury maturities from 3 month to 30 year.
• The "target rate" is: 1967 to 1970, the five day moving average of the daily effective fed funds rate; from 1971 to June 1990, our interpretation of the "target rate" reported by the Federal Reserve Bank of New York; from July 1990, the "target rate" reported by the Federal Reserve Board.
• Our spreads are grouped into three combinations: Target Rate vs. 3 month, 6 month and 1 year U.S. Treasury Yields; Target Rate vs. 2 year, 3 year and 5 year U.S. Treasury Yields; Target Rate vs. 7 year, 10 year and 20/30 year U.S. Treasury Yields.
• Each chart show one of the above combinations, the Target Rate and shaded gray areas to denote recessions.
• The time periods covered are: 1968 to 1977; 1978 to 1985; 1986 to 1998; 1998 to present (February 10, 2006).

Here are our interpretations of what the following charts tell us:

• Every recession since 1970 has been preceded by the yield curve inverting.
• The yield curve inversions are broadly based, across various maturities (not just a single, particular spread).
• Normally, the yield curve is still inverted at the onset of the recession (1990 is an exception).
• Choosing the Target Rate vs. the 10 year as our proxy, the lead times in calendar days from inversion to the onset of the recession are:
  • January 1970 to November 1970 Recession - 357 days
  • December 1973 to March 1975 Recession - 276 days
  • February 1980 to July 1980 Recession - 497 days
  • August 1981 to November 1982 Recession - 307 days
  • August 1990 to March 1991 Recession - 553 days (Inverted from 1-25-89 to 1-17-90, but not at onset of recession)
  • April 2001 to November 2001 Recession - 315 days
• The Federal Reserve's campaign to find a "neutral rate" has pushed the yield curve to the brink of inverting.
• The historical record suggests a recession in the future should be preceded by a broadly based inversion lasting at least nine months.

© 2006 Ron Griess
Editorial Archive

Thechartstore.com does not promote the use of the information contained herein for any specific purpose, and makes no representations or warranties that the information contained in this publication is suitable for the particular purposes of the subscriber or any other party. Thechartstore.com assumes no responsibility or liability of any kind for the use of the information contained herein by the subscriber or any other party.

Reproduction of any or all of the Weekly Chart Blog without prior permission is prohibited.

Contact Information
Ron Griess
www.thechartstore.com
Email

over 4,000 charts on the site!