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CRS – The Yield Curve and Predicting Recessions – The Yield Curve and Predicting Recessions. April 11, 2019 IN11098. “Economists and financial markets closely monitor interest rates in hopes of gleaning information about the path of the economy. One measure of particular interest is the “yield curve.” Recently, the yield curve associated with U.S. Treasuries inverted. This Insight discusses possible explanations for the inversion, including whether the inversion is signaling that the economy will enter a recession. What Is the Yield Curve? – A yield curve plots the interest rates on various short-term, medium-term, and long-term bonds by the same issuer. Normally, short-term interest rates are lower than longer-term interest rates for a variety of reasons, producing an upward-sloping yield curve. For example, Figure 1 shows the Treasury bond yield curve on February 5, 2015; as the maturity date lengthens, the yield is higher at each point on the curve. What Is a Yield Curve Inversion? Occasionally, short-term interest rates are higher than longer-term rates, creating an inverted yield curve. Recently, the yield curve associated with U.S. Treasuries has shown signs of inversion. On March 27, 2019, the yields on 3-year and 5-year Treasuries were below the yield on shorter-term Treasuries. The 10-year yield was also lower than the yield on Treasuries with a maturity of a year or less. The yields on 20-year and 30-year Treasuries were above the yield on 3-month Treasuries, but the spread between the two has been narrowing, suggesting that the portions of the yield that have not inverted are beginning to flatten. As the figure illustrates, the yield curve inversion has occurred because short-term rates have risen and long-term rates have declined…”

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