What yield curves tell us about recession risks

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Summary – Key messages

• The US economy is growing at full speed. Inflation is already at the Federal Reserve’s target with convincing signs that nominal wages are accelerating. We therefore see little to halt the US monetary tightening
• Despite 10Y UST yields recently reaching a 7-year high, we expect the debate over the meaning of yield curve inversion to dominate 2019. The predictive behaviour of the yield curve slope has seen material flattening systematically precede the previous eight US recessions
• We argue that the relationship between yield curve slope and recession is not casual but causal, through a tightening of bank lending standards (volumes) and of credit spreads (prices). As such its signal should continue to work in the future