On this sub, I've often seen it thrown around that the yield curve is inverted since the yield spread between 3- and 5-year treasuries fell below zero last December. And everyone here seems to be aware that the inversion of the yield curve tends to be followed by a recession within 1-2 years.
But putting it like this is very misleading. What has inverted in December was only a part of the yield curve, and it is not true that the inversion of any part of the yield curve has in the past reliably predicted an imminent recession.
Looking at the 3-5-year spread in particular, you can see that it hasn't been a reliable predictor of recession over the years. Even when it does predict a recession, it may be way too early, for example it dipped below zero during the last cycle for the first time in August 2005, 28 months before the recession began.
Instead, it's the 2-10-year spread that is frequently cited as a reliable predictor of recession. That one is still at +0.16.
I'm not claiming that we will not enter a recession in two years, I just thought some people may get the wrong impression that (based on the yield curve's track record) a countdown has started in December, which will end in a recession within 2 years. Even assuming that the yield curve remains a reliable predictor, this would only be the case when the 2-10-year spread dips below zero.
Submitted January 13, 2019 at 08:27AM by jacquesopper http://bit.ly/2RmBZGS
