US yield curve as a predictor of recessions – Danske Bank

The San Francisco Fed yesterday released a paper on the US yield curve as a predictor of recessions, notes the research team at Danske Bank.

Key Quotes

“The paper concludes that an inversion of the yield curve has been a reliable indicator of recession but that the most useful measure is the difference between US 10-year yields and the 3-month Treasury rate - not the spread between 10-year yields and 2-year yields, which is often referred to.”

“Measured on this spread they highlight that the curve is still far from inverting as the spread is nearly one percentage point away from inverting. The paper also argues against the case that 'this time is different' compared to previous periods of curve flattening when judging the predictive properties of the yield curve.”

“Finally, the authors highlight that correlation is not the same as causation and say that 'great caution is therefore warranted in interpreting the predictive evidence'.”

“If the paper is representative of the FOMC views it doesn't suggest that the yield curve should be an obstacle for a continued gradual hiking path well into 2019.”