What Is the Yield Curve? Wall Street’s Recession Alarm Is Ringing.

But which part of the yield curve matters?

On Wall Street, the most commonly referenced part of the yield curve is the relationship between two-year and 10-year yields, but some economists prefer to focus on the relationship between the yield on three-month bills and 10-year notes instead.

That group includes one of the pioneers of research into the yield-curve’s predictive power.

Campbell Harvey, now an economics professor at Duke University, remembers being asked to develop a model that could forecast U.S. growth while he was a summer intern at the now-defunct Canadian mining company Falconbridge in 1982.

Mr. Harvey turned to the yield curve but the United States was already roughly a year into recession and he was soon laid off because of the economic climate.

It wasn’t until the mid 1980s, when he was a Ph.D. candidate at the University of Chicago, that he completed his research showing that an inversion of the three-month and 10-year yields preceded recessions that began in 1969, 1973, 1980 and 1981.

Mr. Harvey said he preferred to look at three-month yields because they are close to current conditions, while others have noted that they more directly capture investors’ expectations of immediate changes in Fed policy.

For most market watchers, the different ways to measure the yield curve all broadly point in the same direction, signaling slowing economic growth. They are “different flavors,” said Bill O’Donnell, an interest rate strategist at Citibank, “but they are all still ice cream.”

Article source: https://www.nytimes.com/2022/07/21/business/yield-curve-inversion.html