The yield curve and its role in predicting U.S. recessions

Abstract

The yield curve, especially the difference between 10-year and 3-month U.S. Treasury yields, has long been seen as a sign that a recession is coming. This thesis looks at how well it can predict recessions by looking at the U.S. recessions of 1990–1991, 2001, and 2008. The study looks at the timing, depth, and length of yield curve inversions and un-inversions. It finds that inversions always come before recessions, but un-inversions may provide a more immediate signal. The results show that the characteristics of inversions are important and that yield curve signals need to be interpreted in the context of the broader context of the economy and policy.