Does the Yield Curve ever lie?

Recession Watch – Yield Curves Can Predict Future Crises, But You Have To Focus More on Curvature and Term Premia Than Slope

 

This report argues that the yield curve slope, by itself, is not a robust predictor of future recessions. Other yield curve parameters need to be taken into account and, specifically, the size and position of the curvature hump in the term structure. In other words, we emphasise curvature and, by implication, the importance of term premia. Not only have term premia recently fallen in size – so indicating greater demand for ‘safe’ assets by investors – but their distribution has become more positively skewed, which has been a better predictor of upcoming recession than the simple yield curve slope. The implication is that the US Fed’s slated future ‘forward guidance’ path may be too aggressive.