An article forthcoming in the Federal Reserve Bank of New York’s Economic Policy Review—Signal or Noise? Implications of the Term Premium for Recession Forecasting—sheds new light on the sources of the yield curve’s success in predicting U.S. recessions.So if recessions begin about twelve months after the inversion, it looks to us as though we've been in one since about mid - 2007.
As authors Joshua Rosenberg and Samuel Maurer explain, studies have shown that when the yield curve inverts—that is, when short-term interest rates rise above long-term interest rates—a recession has followed in twelve months. One view holds that the ability of the yield curve’s slope to predict recessions stems from interest rate expectations: the markets anticipate an easing of monetary policy in response to an upcoming deterioration in the economic outlook, and the decline in expected future short-term rates drives down current long-term rates.
And speaking of reversions to the mean, the spread between Baa corporates and the market yield of the Ten Year Treasury are once gain returning to something a little more 'normal.' We'll let you draw your own conclusion as to why corporate bonds of the more risky nature were so underpriced risk-wise by the markets for so long. Looks like that coincided with the reflation of the stock market bubble, and the growth of the subprime mortgage bubble. But of course, the Fed couldn't see it, didn't do it, weren't there, noway, nohow, my dog ate the risk spread, etc. in this age of innocence by the claim to managerial stupidity, ignorance, and general malfeasance.
As the neo-Keynesian academics, and logical positivists like Chairman Greenspan fundamentally have established, "Moral hazard be damned; the whole of economic law shall be do what thou will.'
