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Does an Inverted Yield Curve Always Precede a Recession?

Investors should note an inversion does not necessarily indicate a recession is imminent

The yield curve inverted recently, when the gap between 10-year and three-month Treasuries narrowed and finally disappeared, ending with the three-month yield higher than the 10-year note. The gap, or premium investors demand for holding the longer-term Treasuries, had been narrowing for the past year.

An inverted yield curve has been a reliable indicator of past recessions, having inverted before each of the last seven recessionary periods according to the National Bureau of Economic Research.

There are several factors, however, that need to be considered before a recession can be reliably predicted. In short, although an inverted yield curve may provide a tight correlation between changes in interest rates and a looming recession, anticipating exactly when a downturn will occur after the inversion is an inexact science. According to data from Bianco Research, past recessions have been preceded by inversions that lasted for 10 days straight. Should the 10-year yield rise back above the three-month Treasury bills and the inversion is broken,

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