The yield curve, which plots yields across Treasury maturities, is still by far the most accurate predictor of recessions, according to new research released Monday by the San Francisco Federal Reserve.
The spread between 2- and 10-year yields is a widely watched section of the curve for its indications of economic health.
An upward sloping curve, with longer-term yields higher than their short-term counterparts, is typical, especially in an expanding economy. An inversion between these two maturities — in other words, if the yield on the 2-year is higher than the 10-year — reliably predicts low future output growth and indicates a high probability of a recession, the Fed branch said in its report. An inverted yield curve has correctly signaled all nine recessions, with only one false positive in the 1960s.
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