Near the end of March, yields on the three-month Treasury bill rose above those of the 10-year Treasury note. Investors could have received a higher yield by locking up their money for a significantly shorter period than for a long period of time. Such occurrences—referred to as inverted yield curves—draw attention because they have preceded every recession since the 1960s, including the Great Recession of 2007–2009.

It’s not a single day or week of inverted yield curves that signal recessions. Rather, it is the average slope of the yield curve over a full calendar quarter, as Duke University professor Campbell Harvey explains here. Harvey identified the link in his 1986 University of Chicago dissertation. I thought many of you would be interested in learning more about this model, given the attention it receives in the financial news media.

Spotting yield curve inversions is easy: Simply look at the Treasury yields on a given day. This information is widely available on many financial and brokerage websites. The historical data needed to calculate the quarterly average is available on the Treasury Department’s website. Those familiar with spreadsheets can simply copy and paste data into a spreadsheet to calculate the average yield. If you don’t want to run the numbers, the Cleveland Federal Reserve tracks the yield curve and predicted gross domestic product (GDP) growth. 

There’s quite a bit of economic data available on the web if you know where to look. The St. Louis Federal Reserve’s FRED database contains current and historical economic data. I use it to track housing starts; year-over-year drops of 30% or more have accompanied or preceded seven of the last eight recessions, according to Sam Stovall of CFRA. You can find out the current odds of the Federal Open Market Committee raising or cutting interest rates by visiting the CME’s FedWatch Tool. Two other sites that may be of interest are the Atlanta Federal Reserve’s GDPNow and the New York Federal Reserve’s Nowcasting Report.

As far as what to do with the information, that depends on your needs and investing style. Most investors would be wise to think in terms of cash flows. To the extent that your cash flow needs are covered for the next four or five years, you shouldn’t have to do much if you fear a slowdown in the economy. This general rule assumes that your basic expenses can be covered without stocks needing to be sold during a bear market in stocks. Your situation may differ, and it can be useful to meet with a financial planner if you have concerns about how an economic downturn may affect you.

From the standpoint of bonds and bond funds, you may not want to act. Individual bonds work well for individual investors when held to maturity. A bond ladder—a portfolio of bonds with differing maturity dates—helps to diversify the risk of changing interest rates. Bond fund managers generally have some discretion to adjust the interest rate sensitivity of their portfolios. But when you try to tactically favor short- or long-term bonds, you run the risk of incorrectly judging how each may change relative to the other.

In terms of equities, the stock market has a long history of forecasting many more recessions than have actually occurred. Even when the stock market is right, it does not move in sync with economic data. Stocks can begin their rebound before a recession ends, leaving you exposed to timing risk if you flee.

I’ll leave you with good news: The economic indicators are calling for continued growth. Things can change quickly and forecasts can be proven wrong, but as we send this month’s issue to the printer the odds of a recession occurring this year remain low.

Economic Websites

• Treasury Yield Curves: www.treasury.gov/resource-center (click on “Data and Chart Center”)
• Atlanta Fed’s GDPNow: www.frbatlanta.org/research (Click on “The Economy at a Glance”)
• Cleveland Fed Indicators: www.clevelandfed.org/en/our-research/indicators-and-data.aspx (Click on “Yield Curve and GDP Growth”)
• CME FedWatch Tool: www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
• FRED Economic Data: https://fred.stlouisfed.org
• New York Fed’s Nowcast: www.newyorkfed.org/research/policy/nowcast