The inverted yield curve: economic recession on the horizon

Martin Motl

A chapter in CNB Global Economic Outlook - April 2023, 2023, pp 13-19 from Czech National Bank, Research and Statistics Department

Abstract: Something unusual has been happening on the US bond market since October 2022, something that is attracting a lot of interest and is sparking concerns among many economists and investors worldwide. Shorter maturity US government debt instruments generate higher returns than longer maturity government bonds. The yield curve for fixed-interest US government instruments has thus had a negative slope for several months, which is also rising over time. This phenomenon has reliably predicted all the economic recessions in the USA in the past more than 50 years. The current difference between the yield on 3-month US Treasury bills and the yield on 10-year US government bonds is now the highest since 1981. Can similar developments be expected again this time? This article sets out to identify the phases of the business cycle in the USA using the slope of the yield curve and the level of implied stock market volatility. It also attempts to estimate the timing of the next economic recession in the USA, which would have a major impact on the global economy as well.

Date: 2023
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