The continued flattening in the US yield curve remains a source of background anxiety for investors. If the curve continues to flatten – we are warned – it must eventually invert. And if it inverts soon, there will be a recession in 2019.
While it is stating the obvious that flattening has to precede inversion, and that inversion is an extremely reliable recession signal, it is inversion, not flattening, that signals a problem – and we’re not there yet. Besides, investors should beware of the usual long and variable lags.
But if the yield curve has proven to be such a phenomenal indicator in the US, why is it that it’s been so useless at predicting recessions elsewhere (see chart)?
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