What does an inverted yield curve really tell us?
It is well documented that an inversion of the yield curve (the shortest-term interest rates rising above the longest-term rates) almost always precedes a recession, and that, if history is anything to go by, once the yield curve becomes inverted there’s a high probability of a recession beginning within the ensuing 12 months. With this in mind, does the US yield curve’s momentary inversion in February of this year combined with its recent return to inverted territory mean that the US economy is bound to enter a recession at some point over the coming year? We are going to answer the above question in a roundabout way because we don’t think the situation is straightforward. In particular, we don’t think it is reasonable to assume that a recession will follow this year’s yield curve inversion, or even to conclude that this year’s inversion of the yield curve means that there is now a high probability of a recession during 2007, simply because a recession has followed most previous inver
