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Does a Flattening Yield Curve Mean Recession?

The myth vs. the reality of predicting an economic downturn—and a bear market—based on the shape of the famous metric.
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Everybody was talking about the yield curve late last year, and it wasn't hard to see why. In 2017 the U.S. Treasury 2s-10s curve touched its flattest level since the period that immediately preceded the global financial crisis a decade ago. Given the curve’s reputation as an oracle of economic performance, the flattening raised concerns in some quarters that the Federal Reserve is making a policy mistake that will tilt the economy into recession.

But is the popular narrative that a flattening curve heralds an economic downturn—and an equity bear market—actually true? I’m a macro strategist who writes Bloomberg’s Macro Man column; I’ve also recently started a MythBusters-style series in Bloomberg Markets magazine where I challenge some of the most basic assumptions in finance. For my latest endeavor, I decided to examine whether the curve-downturn connection is myth or reality.