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The ten year minus 3 month is back in positive territory for the first time in about 5 months:

https://stockcharts.com/h-sc/ui?s=%24UST10Y-%24UST3M&p=D...
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It's not that the yield curve would remain inverted until the recession begins, but that the fact that it inverted is an indicator of a near future recession.

Fuskie
Who thinks there are a whole bunch of factors in play, from the trade war to uncertainty in the 2020 election to a potential new persian gulf conflict among them...

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Not according to this source. Positive on 7.23.19 for one day only. The pattern this year has been inverting, getting close to the 90 day/1 quarter mark, go normal for a day, then invert again. IIRC, July was the 3rd time it happened since all the talking heads have been screaming about the inverted yield.

JLC

https://www.treasury.gov/resource-center/data-chart-center/i...
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Not according to this source.
Shouldn't you be looking at this fred chart for 10 year minus 3 month?
https://fred.stlouisfed.org/series/T10Y3M

RAM
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Not according to this source. Positive on 7.23.19 for one day only. The pattern this year has been inverting, getting close to the 90 day/1 quarter mark, go normal for a day, then invert again. IIRC, July was the 3rd time it happened since all the talking heads have been screaming about the inverted yield.

It's two market days in a row now. And it's not only that the 10 year has risen. The 3 month has fallen steadily for a month, reflecting the Fed's latest rate cut. So it doesn't seem like the normalization of the curve is a one day fluke.

Elan
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It's not that the yield curve would remain inverted until the recession begins, but that the fact that it inverted is an indicator of a near future recession.

Fuskie
Who thinks there are a whole bunch of factors in play, from the trade war to uncertainty in the 2020
election to a potential new persian gulf conflict among them...


Agreed but perhaps the strongest and most consistent leading indicator of a out there is the yield curve.
All of them 10y-3m, 10y-1y,10y-2y,forward6q-3m and 10y exp-3m have been consistent leading
indicators and they typically return to positive before the downturn starts.
FRED data on their site only goes back to 1982 but heres a link going back to 1955 that shows 4 more
calls.
https://www.financialsense.com/matthew-kerkhoff/which-yield-...

So the yield curve has defiantly flashed a warning of bad things to come. But a majority of backtested
TAA strategies have been moving from caution to risk over the last couple of months. Always enough
indicators to let you get yourself in trouble ;<)

RAM who is more in safe than risk based more on my age than conviction.
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Agreed but perhaps the strongest and most consistent leading indicator of a out there is the yield curve.
All of them 10y-3m, 10y-1y,10y-2y,forward6q-3m and 10y exp-3m have been consistent leading
indicators and they typically return to positive before the downturn starts.


Very true. The yield curve has flashed its signal, and the fact that it has gone back to normal is not an all-clear signal. The problem with this signal is that it leads by so much, typically perhaps a year ahead of a recession, that it's not actionable in the short term.

Elan
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The question is, for all the times that the inverted yield curve has preceded a recession, how many months elapsed since it first or last inverted and the recession officially began? That could serve as an indicator of how long a window we have until an "all-clear" could be anticipated.

Personally, I think there are so many uncertainties pulling today's economic picture in multiple directions that little that we know from before can reliably apply to now.

Fuskie
Who would also be interested in any contraindications, where an inverted yield curve did not precede to a recession...

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Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
Fool Code of Conduct: https://www.fool.com/legal/the-motley-fools-rules.aspx#Condu...
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The question is, for all the times that the inverted yield curve has preceded a recession, how many months elapsed since it first or last inverted and the recession officially began? That could serve as an indicator of how long a window we have until an "all-clear" could be anticipated.

The question we're really interested in is how well the inversion predicts a stock market downturn, not how well it predicts a recession. The market itself is a leading economic indicator. If you wait for the recession you're going to see the market downturn in your rear view mirror.

Elan
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The problem with this signal is that it leads by so much, typically perhaps a year ahead of a recession, that it's not actionable in the short term.

One thought:
The lag to the start of a market slide is likely smaller.
For the business cycle driven bear markets, the broad equity market typically peaks well before the "official" recession start date.

I've been meaning to look at the historical distribution of relative lags, but I've been too lazy lately.
I've been more intent on may latest favourite gin. Mmmm.

Jim
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I've been more intent on may latest favourite gin.

Which is...?
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I've been more intent on may latest favourite gin.
...
Which is...?


Monkey 47.
It's the first one I've found that's so tasty it's nice by itself on the rocks.
Or with a pinch of water like a whisky, as it's unusually high alcohol.

Jim
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Munfofitch said:
"I've been meaning to look at the historical distribution of relative lags"

This article by Cam Harvey (widely considered as the "inventor" of the yield curve indicator based on his PhD work) gets to what you're looking for.

https://www.linkedin.com/pulse/inverted-yield-curves-stock-r...

The first figure averages all inversions and calculates returns looking back and forward 36 months from inversion point.

The following figures do the same but looks at each of the eight individual inversions.
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Thanks for the link to the article. I prefer to reference Cam Harvey rather than anyone else when it comes to the yield curve.

I have often asked, "Why does the yield curve precede recessions?" The most reasonable answer I have found is that bankers have no incentive to make loans for 10 years as opposed to 3 months. Hence, when the yield curve is inverted, they change their behavior which tightens money supply for capital investments - which in turn constricts the economy with some lag. I have not been able to find historical bank loan information to corroborate this theory.

Growth in bank lending has been steady and positive throughout this yield curve inversion. Causing me ask the dangerous question, "Is this time different?"

John
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I repeated the analysis presented in the paper linked above, with similar conclusions. The paper defines yield inversion events using a quarterly average of 10 year minus 3 month Treasury interest rates. There have been 8 events in the last 50 years, with the latest 4 months ago.

I found slightly different event dates. (There are a few different interest rate series that use different combinations of auction and secondary market rates. The data I used was slightly different than what was used in the paper.)

yield inversion observation
1969-08-31
1973-07-31
1979-01-31
1980-12-31
1989-07-31
2000-08-31
2006-08-31

The calculated excess Market returns were similar:
            FR12m   FR24m  FR36m
paper -8.7% -7.0% -8.1%
MktExcessR -11.4% -8.0% -5.9%


Converting these into CAGR:
            CAGR1  CAGR2  CAGR3  avgCAGR
paper -9% 2% -1%
MktExcessR -11% 4% 2% 7%


CAGR1 is for the 12 months after the yield inversion event.
CAGR2 is for months 13 to 24 after the event.
CAGR3 is for months 25 to 36 after the event.
avgCAGR is average 12 month return from 1953 to 2016.

Adding the risk free rate back to get actual returns:
            CAGR1  CAGR2  CAGR3  avgCAGR
Mkt -4% 11% 9% 12%
gSPY -3% 10% 8% 12%
SP1500EW 2% 15% 14% 13%
LargeValue 2% 10% 15% 15%
SmallValue 2% 13% 17% 16%


SP1500EW is S&P 1500 equal weight.
LargeValue is calculated as Mkt + HML/2
SmallValue is calculated as Mkt + HML/2 + SMB/2

Most of the damage is done the first year after the yield inversion. But the linkage is weak.
There are only 7 data points with a wide scatter in results.
One year market returns after a yield inversion averaged -4% with a range of -27% to 25%.

              Mkt
observation CAGR1
1969-08-31 -15%
1973-07-31 -26%
1979-01-31 25%
1980-12-31 -3%
1989-07-31 3%
2000-08-31 -27%
2006-08-31 15%


Comparing these 7 yield inversions to bull market tops:

              Mkt
observation CAGR1 market top days months
31-Aug-1969 -15% 29-Nov-1968 -275 -9
31-Jul-1973 -26% 11-Jan-1973 -201 -7
31-Dec-1976 missed
31-Jan-1979 25% 28-Nov-1980 667 22
31-Dec-1980 -3% 28-Nov-1980 -33 -1
25-Aug-1987 missed
31-Jul-1989 3% 4-Jun-1990 308 10
31-Aug-2000 -27% 24-Mar-2000 -160 -5
31-Aug-2006 15% 9-Oct-2007 404 13


4 bull market tops were 1 to 9 months before yield inversions.
3 bull market tops were 10 to 22 months after yield inversions.
2 bull market tops do not line up with any yield inversions.

There was a yield inversion event observed on June 30.
The market is up 3% since June 30, with a new high on October 30.
Look for a bull market top sometime between April 2020 and April 2021.
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