Yield
Curve Inversions and Recessions
by Ron Griess
Proprietor, The
Chart Store
www.thechartstore.com
February 24, 2006
~
From The Chart Store Weekly Blog, February 10, 2006 ~
The
financial press continues to chatter about the yield curve
inverting. We decided to do our own little study to see what the
record shows. Here's what we use for our study and the charts that
follow:
-
We
calculate the daily yield spread between the "target
rate" and the spectrum of U.S. Treasury maturities from
3 month to 30 year.
-
The
"target rate" is: 1967 to 1970, the five day
moving average of the daily effective fed funds rate; from
1971 to June 1990, our interpretation of the "target
rate" reported by the Federal
Reserve Bank of New York; from July 1990,
the "target rate" reported by the Federal Reserve
Board.
-
Our
spreads are grouped into three combinations: Target Rate
vs. 3 month, 6 month and 1 year U.S. Treasury Yields;
Target Rate vs. 2 year, 3 year and 5 year
U.S. Treasury Yields; Target Rate vs. 7 year, 10 year and 20/30
year U.S. Treasury Yields.
-
Each
chart show one of the above combinations, the Target Rate and
shaded gray areas to denote recessions.
-
The
time periods covered are: 1968 to 1977; 1978 to 1985;
1986 to 1998; 1998 to present (February 10, 2006).
Here
are our interpretations of what the following charts tell us:
-
Every
recession since 1970 has been preceded by the yield curve
inverting.
-
The
yield curve inversions are broadly based, across various
maturities (not just a single, particular spread).
-
Normally,
the yield curve is still inverted at the onset of the
recession (1990 is an exception).
-
Choosing
the Target Rate vs. the 10 year as our proxy, the lead times
in calendar days from inversion to the onset of the
recession are:
-
January
1970 to November 1970 Recession - 357 days
-
December
1973 to March 1975 Recession - 276 days
-
February
1980 to July 1980 Recession - 497 days
-
August
1981 to November 1982 Recession - 307 days
-
August
1990 to March 1991 Recession - 553 days (Inverted from
1-25-89 to 1-17-90, but not at onset of recession)
-
April
2001 to November 2001 Recession - 315 days
-
The
Federal Reserve's campaign to find a "neutral rate"
has pushed the yield curve to the brink of inverting.
-
The
historical record suggests a recession in the future
should be preceded by a broadly based inversion lasting
at least nine months.
© 2006 Ron Griess
Editorial Archive
Thechartstore.com
does not promote the use of the information contained herein for any
specific purpose, and makes no representations or warranties that the
information contained in this publication is suitable for the particular
purposes of the subscriber or any other party. Thechartstore.com assumes
no responsibility or liability of any kind for the use of the
information contained herein by the subscriber or any other party.
Reproduction
of any or all of the Weekly Chart Blog without prior permission is
prohibited.
|
