The inversion of the yield curve: Still a reliable indicator of recession?

Knee-jerk reactions could become self-fulfilling

Last week, the US and UK yield curves briefly inverted for the first time since 2007 and 2008 respectively, meaning that the yields offered on 10-year government bonds were lower than those offered on 2-year government bonds.

While it is true to say that every recession has been preceded by an inversion of the yield curve, it is also true that not all inversions have led to recessions. That aside, we are tempted to say that this time it is different. Famously the most dangerous words in investing but fitting, we think, at least as far as this latest US inversion is concerned. Typically, yield curves invert because shorter-term yields spike due to central bank action to choke off inflation, while longer-term rates stay relatively stable. This time both US 2-year yields and US 10-year yields fell sharply, with ...