The Economist explains why bond yields predict recessions here…
”AS NAMES for market phenomena go, “inverted yield curve” lacks a certain punch. It is no “death cross” or “vomiting camel”. But what it lacks in panache, the inverted yield curve more than makes up for in predictive potency. Just before each of America’s most recent three recessions the yield curve for government bonds “inverted”, meaning that yields on long-term bonds fell below those on short-term bonds. Economists and stockmarkets seem unconcerned that inversion looms again (see chart). But despite generally strong economic data, there is reason to heed the warning signs flashing across bond markets.”
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