Why Is An Inverted Yield Curve Important?
An inverted yield curve simply means that yields on long-term bonds are below those of short-term bonds. The following charts shows ten year treasury yields minus the two year treasury yield. The shaded areas of the chart reflect when the U.S. economy went into recession. Prior to the last three recessions the yields on long-term bonds minus the yields on short-term bonds was negative, or “inverted.”
Source: St. Louis Fed
The yield yield curve turned negative just prior to the last three recessions:
[i] In February 2000 the curve inverted before the tech crash that came later that year; [ii] In December 2005 it was a precursor the the Financial Crisis of 2008; [iii] the yield curve is flattening again, which could be an early warning sign we are headed for recession.
Ralph Baker’s Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead foretold this recession. Shock Exchange pointed out the folly of President Obama’s economic policy that inured to the rich, and how once these policies ran their course another recession would be upon us.
