Inverted Yield Curves Lead Recessions

This is a great chart showing how inverted yield curves are a "heads-up" that a recession is coming. The first thing we notice is that “normal” is an appropriate label for the upward sloping yield curve. An inverted yield curve occurs when long-term yields fall below short-term yields. Under unusual circumstances, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future.

According to a study done by the Bureau of Economic Research, an inverted curve has indicated a worsening economic situation in the future 6 out of 7 times since 1970. There has been some ugly data lately and you hear people talking "double dip" again. But not to worry says JPMorgan strategist Thomas J. Lee. 30-year yields have been coming down, and the spread is narrowing, but we're nowhere near inversion.

Sources:

Yield Curve Inversions and Future Economic Growth (Campbell Harvey)

How to Know if a Recession is Really on its Way (Business Insider)