7 Warning Signs of a Looming Recession


7

The Treasury Yield Curve Flips

inverted yield curve
Normally, the yields for short-term bonds are lower than longer-term bonds, but every so often those rates flip upside down. Federal Reserve Bank of St. Louis

One of the surefire signs of a looming recession is a geeky little graph called an inverted treasury yield curve. (We wrote an entire article about that graph.) United States treasury bonds are the most reliable, low-risk investment around. But since the yield (or return) on treasury bonds is relatively low, investors tend to avoid sinking their money into bonds unless the economic future looks bleak.

When investors are nervous about the direction of the economy, the demand for long-term treasury bonds (five-year, 10-year and 30-year) goes up and their yields or interest rates go down. Normally, the yields for short-term bonds are lower than longer-term bonds, but every so often those rates flip upside down. And when that happens, a recession is usually around the corner.

The treasury yield curve has flipped or inverted before the last seven recessions with only one false positive back in 1998. The good news is that it takes an average of 18 months between an inverted yield curve and the start of a recession, so there's plenty of time to stock up on canned goods and ramen noodles for the coming dry spell.