YIELD CURVE AS A RECESSION FORECASTER
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What is the yield curve?
The yield curve is flattening in 2018 and if it inverts there will be a recession.
What to do?
In this article I am going to explain what is the yield curve, what does a flattening or steepening yield curve mean, how the yield curve affects the economy and see whether the current yield curve indicates that we are close to a 2018 recession.
What is the yield curve
The yield curve is a chart showing the yield on bonds starting with short term maturities to long term maturities. The used bond maturities are from one month to 30 years.
What the yield curve is showing is practically the cost of borrowing money over time for the U.S. government in this case.
Steepening and flattening yield curve
The yield curve can be flat or steep.
A steep yield curve is usually at the beginning of an economic expansion. Investors fear future higher inflation and demand a higher return for the long term but the central bank still keeps short term rates low. Thus, the yield steepens.
A flat yield curve shows that long term investors are willing to take an equal yield as short-term investors in order to lock in the yield for the longer term. This means they are expecting lower yields in the future. And, historically is has been the case that economic recessions follow a flat yield curve.