April 14, 2022

Inverted yield curve signals looming economic downturn

The power of the yield curve to predict future economic trends has been studied extensively. Economists and researches alike have documented its power to predict a looming economic recession. According to some, when the yield curve inverts, it signals a better than two-thirds chance that the economy will enter into a recession within a year and a 98% chance that it will do so in within two years.

When short-term interest rates spike above long-term interest rates, it signals that either monetary policy is attempting to address a problematic economic condition or that investors are growing weary of the future economy—either signaling trouble ahead.

On April 1 and April 4, 2022, interest rates on 2-year Treasurys were modestly higher than the yields on 10-year Treasurys, by 0.06% and 0.01%, respectively. The last time the yield curve inverted was in the third quarter of 2019.

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