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Economic SYNOPSES
short essays and reports on the economic issues of the day
2006 ■ Number 10

Yield Curve Inversions and Cyclical Peaks
Richard G. Anderson
ll National Bureau of Economic Research (NBER) business
cycle peaks since 1960 have been preceded by a flattening
or inversion of the Treasury yield curve, leading some
observers to express concern that the recent flattening of the yield
curve might presage a near-term business cycle peak. However,
the historical record, shown in the table, suggests that the relationship between yield curve inversions (negative slope) and subsequent economic downturns is tenuous.
In the table, the yield curve’s slope is measured by the spread
between Treasury constant-maturity yields at 10-year and 3-month
maturities, a measure that past studies have labeled as the most
reliable for predicting changes in economic activity. In the left
panel, each row corresponds to a yield curve inversion, the slope
having been positive during the previous month; in the right panel,
each row corresponds to an NBER business cycle peak. Yield
curve inversions tend to predict approximately twice as many
recessions as actually occur. The durations and maximum yield
spreads also vary sharply. Half of the inversions lasted 3 months
or less; only three lasted 1 year or more. Half of the inversions
also had maximum spreads of less than 28 basis points, with only
three greater than 150 basis points. Finally, the number of elapsed
months from the onset of inversion to the cycle peak also is varied.

A

Six episodes lasted 9 months or less; six lasted 1 year or more.
Clearly, although a business cycle peak eventually followed each
inversion, the timing has been imprecise.
In the right-hand panel, the first three NBER cycle peaks were
not preceded by inversions (these may be unreliable because the
long-term Treasury bond market was thin); only six peaks remain.
The next two peaks, 1969 and 1973, are the “classic” cases in which
the inversion began approximately 6 months prior to the peak
and continued until after the peak. The next cycle peaks, in 1980
and 1981, occurred during the Federal Reserve’s aggressive disinflationary policy and perhaps are difficult to generalize. Finally,
although an inversion occurred prior to the past two peaks, in
1990 and 2001, the yield curve regained its positive slope prior
to the cycle peak as the Federal Open Market Committee aggressively lowered short-term rates.
In short, the variability of inversion episodes suggests caution
when interpreting changes in the yield curve as leading indicators
of business cycle peaks. ■
A longer version of this essay is available on the author’s web page at
research.stlouisfed.org.

Yield Curve Inversions and Cycle Peaks
Beginning
month
Jan 1966
Sep 1966
Dec 1968
Apr 1969
Jun 1969
Jun 1973
Nov 1974
Nov 1978
Oct 1980
Jun 1989
Nov 1989
Jul 2000

NBER Business Cycle Peaks*

Duration
(months)

Max
spread

Next
peak

Month to
peak*

1
6
3
1
9
16
1
18
12
2
2
7

–.10
–.49
–.28
–.17
–.51
–1.6
–.04
–3.3
–3.5
–.16
–.08
–.70

Dec 1969
Dec 1969
Dec 1969
Dec 1969
Dec 1969
Nov 1973
Jan 1980
Jan 1980
Jul 1981
Jul 1990
Jul 1990
Mar 2001

47
39
12
8
6
5
62
14
9
13
8
8

Peak

Previous
inversion*

Duration
(months)

Max
spread

Lead
(months)*

Jul 1953
Aug 1957
Apr 1960
Dec 1969
Nov 1973
Jan 1980
Jul 1981
Jul 1990
Mar 2001

—
—
—
Jun 1969
Jun 1973
Nov 1978
Oct 1980
Nov 1989
Jul 2000

9
16
18
12
2
7

–.51
–1.6
–3.3
–3.5
–.16
–.70

6
5
14
9
8
8

NOTE: * Number of months between initial inversion and cycle peak.

Views expressed do not necessarily reflect official positions of the Federal Reserve System.

research.stlouisfed.org