As fears about being in or entering recession occupy us, we look for indicators of where we are at and the Yield Curve is one such thing.
Driving the news: Growing fears about inflation have hammered a key measure of the yield curve in recent days, pushing it suddenly much closer to “inversion” territory.
Why it matters: An inverted yield curve is often said to be one of the single best objective predictors of economic recession.
How it works: Roughly speaking, the yield curve is the difference in yields on U.S. government debt with different maturities.
When things are normal, short-term debt has a lower yield than longer-term debt — since the investor lending the money is taking on less risk.
But every now and then, the yield on shorter-term debt zooms higher than that of longer-term bonds — and that’s an inverted yield curve.
There are many different versions of the yield curve. The most commonly cited one — the difference between two-year and 10-year Treasury notes — is already deeply inverted, and has been for a while.
The intrigue: But according to economists, that’s not the iteration of the curve that actually has predictive power about the economy.
The one that does — the difference between three-month Treasury bills and 10-year notes — was looking pretty healthy until a few weeks ago. (This version of the curve was the one that was originally spotlighted as a great indicator by economist Campbell Harvey in the 1980s.)
Threat level: Since just the end of June, this crucial version of the yield curve has collapsed from roughly 1.6 percentage points to about 0.60 percentage points.Axios Markets By Matt Phillips and Emily Peck · Jul 15, 2022