The charts above display the spreads between long-term and short-term US Government Bond Yields. The flags mark the beginning of a recession according to Wikipedia.
A negative spread indicates an inverted yield curve. In such a scenario short-term interest rates are higher than long-term rates, which is often considered to be a predictor of an economic recession. Typically the spread between long-term and short-term bond yields is positive, with investors demanding more compensation to hold a bond for a longer period given the increased risk of inflation and other uncertainties.
According to Alhambra investments, when short-term rates are higher than long-term rates (when the yield curve is inverted), it usually means that investors expect short-term rates to fall. Short-term rates fall when economic growth is weak, which is why an inverted curve is associated with recessions. Furthermore, the inversion is not the only important observation. Right before the recession, the yield curve starts to steepen. That happens because the market starts to anticipate multiple rate cuts from the Federal Reserve and short-term rates fall faster than long-term rates.
Special thanks to Steven Sabol, creator of Capital Markets Data, for generously providing the data that led to the development of this page.
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