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Why The U.S. Yield Curve Reliably Predicts U.S. Recessions

Published Tue, 01 Oct 2019 05:12:47 -0400 on Seeking Alpha

By Richard M. Salsman
The U.S. Treasury yield curve, depicted by maturities on a horizontal axis and corresponding interest rates (yields) on a vertical axis, is normally upward sloping, with yields on bonds (10-year maturity and beyond) and notes (intermediate term) lying above yields on bills (short term). Infrequently - but importantly, for economic and investment forecasting - the yield curve becomes inverted, with long-term bond yields lying below short-term bill yields.
Over the past half-century in the U.S., yield-curve inversions have been important because they've reliably predicted all seven U.S. recessions, beginning roughly a year in advance (see table). Those recessions, of course, have been closely associated with bear markets in stocks and bull markets in bonds. It matters a lot - or it should, for those who care about portfolios.

The yield curve's forecasting record since 1968 has been perfect: not only has each inversion been followed by a recession, but no recession has occurred in the absence of a prior yield-curve inversion. There's even a strong correlation between the initial duration and depth of the curve inversion and the subsequent length and depth of the recession.
Having conducted substantial research and issued scores of reports in recent decades on the yield curve's meaning and forecasting power, I've found that the curve is best measured as the spread between the 10-year Treasury bond yield and the 3-month Treasury bill rate -... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
PROSHARES ULTRAPRO SHORT S&P 500 25.26   0.0 0.00 0.00 2.32
VANGUARD EXTENDED DURATION TREASURY ETF 137.28   0.0 0.00 0.00 2.29
SPDR DOW JONES INDUSTRIAL AVERAGE ETF TRUST 272.32   0.0 0.00 5.67 2.10
PROSHARES ULTRASHORT S&P 500 28.97   0.0 0.00 0.00 1.97
SPDR S&P 500 ETF 301.29   0.0 0.00 5.42 1.82
POWERSHARES QQQ TRUST SERIES 1 193.23   0.0 0.00 1.49 0.78
SPDR BARCLAYS CAPITAL 1-3 MONTH T-BILL ETF  

PROSHARES ULTRAPRO SHORT S&P 500 - SPXU
PROSHARES ULTRAPRO SHORT S&P 500 - SPXU  


Older articles featuring Proshares Ultrapro Short S&p 500 (SPXU):
Why S&P 500 Remains A Buy With 10Y Treasury Yield At 2%
Yield Curve Improvement Bodes Well For Economy
Dividends By The Numbers In October 2019
The Shifting State Of Yields
The Inverted Yield Curve
Fading Risk Aversion Will Boost Bond Yields
Yield Curve Disinversion
Bond Market History: When The Yield Curve Un-Inverts
Why Dividend ETFs, REIT ETFs, And Low-Volatility ETFs Still Work
Weekly High Frequency Indicators: Yield Curve Boosts Long-Term Forecast, Consumer Still Solid

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