Courtesy of Mish.
Reader Eric is curious about yield curve inversions. He writes …
Hi Mish
I’ve been a loyal reader for many years. Regarding the yield curve inversion, which pair is the best, most reliable indicator of a recession? As you mentioned in your post there was an inversion between the 6 months and 1 year, but short term fluctuations can create temporary graphical anomalies. Is the bedrock of the inverted yield curve the 1-year to 10-year spread?
Thanks.
Eric
Eric is inquiring about my post Yield Curve Inversion Coming Up?
An inversion occurs when shorter term rates have a higher yield than longer dated rates. Typically this is a strong recession warning.
The 2-10 spread was always considered a classic spread to watch, and the St. Louis Fed has a predefined chart. But I expect the next recession to hit before the yield curve inverts.
Why? Because yields at the short end of the curve are simply too close to zero for the curve to invert.
Discard any notions that a yield curve must invert before a recession. Recessions without inversions happen frequently in Japan.
2-Year to 10-Year Spread
