The Inverted Yield Curve

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The inverted yield curve is usually a sign that a recession is soon to come. In a normal environment, the interest rates on short term fixed income securities are lower than the interest rates on long term fixed income securities. When the interest rate on short term securities becomes higher than the interest rate on long term securities the yield curve is said to have been inverted. This is usually a sign of an upcoming recession. Every time the yield curve has inverted since 1955 the economy has plunged into a recession within the next 7 to 24 months. Recently this indicator has become questionable because of the high demand by foreign countries for products backed by U.S. government debt.

Here’s a list of some previous recessions and how long it took for the recession to start once the yield curve inverted:

Recession NameDurationLength# of months after inverted yield curve recession occurred
Recession of 1969–70Dec 1969-Nov 197011 months3
1973–75 recessionNOV 1973-Mar 19751 Year 4 Months7
1980 recessionJan 1980-July 19806 Months15
1981–1982 recessionJuly 1981-Nov 19821 Year 4 Months10
Early 1990s recession in the United StatesJuly 1990-Mar 19918 months6
Early 2000s recessionMar 2001-Nov 20018 months9
Great RecessionDec 2007-June 20091 Year 6 Months9

The yield curve has inverted 1 time in March this year and 3 times in August of this year. Every time the curve has inverted this year the market has become more volatile in the following days. Fears of a recession have been triggering pre-mature market sell-offs.