The yield curve inverting has dominated headlines recently for good reason; it’s the only economic indicator that has a perfect track record of predicting a recession.
A steepening yield curve signals that investors have positive expectations for economic activity, and a flattening yield curve means the opposite. Shorter-term rates are surging higher as traders prepare for a number of rate hikes this year. Meanwhile, longer-term rates aren’t rising as quickly, signaling that investors anticipate higher rates will slow down the economy.
The indicator is observed when shorter-term rates are above longer-term ones, and every time that’s happened since 1955, the economy went into a recession between six and 24 months later.
The current shape of the yield curve, however, is a signal of what is already known to investors: Inflation is too hot, and growth is going to moderate.
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