The chart below displays the current yield curve for U.S. Treasury securities. Click on the date to select and display past yield curves. A case study of the Great Recession of 2007-09 follows.
Case Study: The Great Recession of 2007-09
The NBER’s Business Cycle Dating Committee estimates that December 2007 coincided with a peak in the overall level of economic activity and the subsequent downturn lasted 18 months – the longest recession since the Great Depression.
Using the interactive app above, let’s look at the U.S. Treasury Yield Curve for November 1, 2005 (enter 2005-11-1) – two years before the start of the Great Recession. The yield curve looks relatively normal with an positive slope across the range of available maturities.
Using the calendar by pointing and clicking on different dates to move forward through time you’ll find that by the end of 2005 (2005-12-30) the yield curve has inverted, with the yield on 10-year Treasury notes falling below the yield on 2-year Treasury securities.
The conventional wisdom at the time was that investors needn’t worry about the inversion because a global savings glut was thought to be bidding up prices and depressing long-term bond yields. However, the Yield Curve remained inverted well into 2007.
By the end of January 2008 – one month into the Great Recession – the Yield Curve had returned to its normal shape. Yet economic activity continued to decline and the recession persisted until June 2009.
The takeaway from this exercise is that the Yield Curve can provide a signal of an impending recession, but does not offer precise information in terms of its timing, length or severity.