Michigan State University

The CRAZY Inverted Yield Curve

Benjamin Hall

“The yield curve does not cause a recession in my framework. The yield curve is just an elegant way to summarize sentiment in the economy.” - Campbell Harvey

An inverted yield curve marks a point where short-term investments in U.S. Treasury bonds pay more than long-term ones. When they flip, or invert, it’s widely regarded as a bad sign for the economy.

Facts in August

  • The rate of the 10-year bond fell below the 1-year bond
  • The rate of the 2-year bond did not close above the 10-year bond (flat)
  • The 10-year bond rate has closed less than the 3-month bond rate every day since May (except July 23)


  • A yield curve inversion must be realized for a full quarter—not merely a few days.
  • Yield curves seem to have grown structurally flatter over time (since 2014) due to a mix of stable low inflation and lower population growth rates. If curves are flatter in general, then inversion events may just start happening from time to time.
  • Some Fed policy makers have periodically questioned the importance placed by market participants on the yield curve, seeing it as only one measure among many recession indicators (I.e. unemployment) that could point to economic distress.
  • It can take up to 34 months for a recession to hit after the curve inverts. Also, the curve's inversion often ends before a recession begins.


  • An inverted yield curve for US Treasury bonds is among the most consistent recession indicators.
  • The average time to recession in the modern era is 58 months—and we are now at 123 months, or more than double the average.
  • Duke CFO survey, a poll with almost 25 years of history, recently showed that 82% of chief financial officers (CFOs) believe a recession will have started by the close of 2020.
  • We are currently experiencing the longest uninterrupted streak of job growth in recorded U.S. economic history. In other words, ‘It’s time’.

August Predictions according to 2 of the 12 Federal Reserve Districts

  • Cleveland Fed predicts 44.1% probability of recession in 1 year.
  • New York Fed predicts 37.9% probability of recession in 1 year.
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