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The yield curve still remains a reliable predictive tool

The term structure of interest rates has long been regarded as one of the most reliable indicators regarding economic recessions. More specifically, economists and financial analysts have monitored the slope of the yield curve in order to assess the probability of an economic recession. Indeed, each of the last seven recessions since 1962 has been preceded by an inversion of the U.S. yield curve. More specifically, every U.S. recession has been preceded by, on average, eight months during which the term spread was negative in the twelve months before its beginning. Currently, the U.S. yield curve is far from inverted, as the term spread is positive, and thus the probability that the U.S. economy will be in recession in the coming twelve months is limited.

According to numerous analysts, the ultra accommodative monetary policy has disrupted market expectations, and, as a consequence, the effectiveness of the yield curve as a forecasting tool has been eradicated.

The report tries to shed light to the debate regarding the predictive ability of the U.S. yield curve, as well as the probability of an economic recession in the next twelve months.