When the Yield Curve Predicts a Recession

Stock market investors should pay at least some attention to the yield curve. An inverted yield curve has signaled a coming recession many times in the post war era, and an inverted yield curve might be appearing again soon.

More often, the yield curve slopes upward, meaning, short term rates are lower than long term rates. Intuitively, “if one in the hand is better than two in the bush”, investors should expect interest rates today to be lower than future rates because of the time value of money when living with monetary inflation. When the yield curve is “inverted”, this means that short term rates are higher than long term rates.

An inverted yield curve represents many different things. It at least represents expectations about the future value of money.

I’ve been using a fun dynamic graph on stockcharts.com for many years, here is a link to the Dynamic Yield Curve.