Yield Curve

4
Underlying value was -1.28 / 60.83% as of August 5, 2024

Status 🚦

  • Score: 4
  • Underlying value: -1.28 / 60.83%
  • Last updated: August 5, 2024

Scoring method: We map the Federal Reserve Bank of New York's calculated probability of recession based on the yield curve to its respective quintile. IMPORTANT: The yield curve value relevant to the current date is value recorded 12 months prior.

Current score reason: The Federal Reserve Bank of New York reports a 60.83% probability of recession in August, 2024 based on the yield curve value of -1.28 from August, 2023.

Description 📝

The yield curve is a graph of bond yields by maturity date. Normally, longer-term bonds have higher yields because of the longer wait until maturity. When shorter-term bonds have higher yields than longer-term bonds, the shape of the graph becomes "inverted". This indicates investors see higher risk in the near term, usually resulting from the expectation of an economic downturn.

Use as a recession indicator 🤔

When people are worried about the economy, they tend to move their investments to lower-risk assets, like long-term government bonds. Increased demand for such bonds results in lower yields. So, the concerns of investors end up being reflected in the yield curve. When the concern is enough to cause the yield curve to invert, it suggests people might be expecting a recession in the near-term.

History 📚

When the U.S. ended the gold standard in 1971, a bond's yield had less meaning when viewed in isolation. In response, the bond traders started looking at yield curves to get a relative view. In 1986, Campbell Harvey showed in his Ph.D. dissertation that the yield curve could be used to forecast recessions. It was in his dissertation that the term "inverted yield curve" was coined.

Performance ⚖️

The yield curve inverted before all recessions since 1950. However, there's been debate about its reliability recently due to the causes of various recessions and false positives.

Additional info