A leading indicator of an impending recession is sounding — loudly, according to analysts.
The U.S. Treasury yield curve, as of this week, has been inverted for a full quarter, which has flipped ahead of each of the last official recessions over the past 50 years, without a single false alarm, reported Slate.
A yield curve becomes inverted when the return on long-term U.S. government bonds dip below short-term bonds, which is seen as a sign the market expects weak or nonexistent growth in the next few years, and little inflation.
Yield curves don’t cause recessions, but their inversion can make business leaders reluctant to hire or invest because they’re worried about economic slowdown.
The last time an inverted yield curve didn’t signal a recession was a brief inversion in the 1960s, when growth dropped but did not fall all the way into the negative.
The yield curve started to invert this year in March, which prompted concerns, but it has now stayed upside-down for a full quarter — which has been the leading indicator of recession.
“The alarm’s gone off,” said Campbell Harvey, the Duke University finance professor who first noticed the relationship between yield curves and recessions.