Karl W. Smith, Columnist

Does an Inverted Yield Curve Mean a Recession Is Coming?

As usual, it all depends on how the Fed reacts.

December 5, 2018 at 11:30 AM UTC

Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.

Inside, they’re probably talking about the yield curve.
Photographer: Chip Somodevilla/Getty Images North America

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By one measure, the yield curve inverted on Monday: The interest rate on five-year Treasury bonds slipped below the rate on three-year bonds. That’s a worrying sign because rates on longer-term bonds are typically higher than those on shorter-term bonds, and such inversions are associated with recessions.

So far, however, I would consider the yield curve only “partially” inverted. A full inversion would be when interest rates on two-year Treasury bonds rise higher than rates on 10-year bonds. In the last 40 years, each time this has happened, the U.S. economy has entered a recession soon afterwards.