Wall Street analysts and investment strategists love to use “recession indicators.” These simple statistics that serve as evidence of (potential) impending economic disaster can be invaluable tools for managing risk. Just look at one of the most famous of them all: the yield curve. Since 1969, a yield curve inversion has preceded every U.S. recession.
The yield curve is a graphical representation of the relationship between the yields of related bonds—most commonly the U.S. 10-year Treasury and two-year Treasury. Typically, shorter-term bonds have lower yields than longer-term bonds because investors are taking more risk by locking up their money for longer. This relationship is represented by an upward sloping curve. But sometimes that yield curve can invert, meaning long-term bond yields drop below short-term bond yields.
