Yield Curve Issues

I am getting back to my monetary economics roots with this post. Bloomberg has a really interesting piece (found here). One well known forecasting tool or leading indicator known to the public at-large is the inverted yield curve. After an inversion the economy goes into recession within a few quarters, or so the story goes.

However, this typically refers to the yield curve for government debt, which experienced enormous government intervention in the aftermath of the Financial Crisis of 2008/9 and the onset of the Great Recession. For the last several years I asked students who would give away their money to the government for around 2% per year for the next 10 years! I got no takers. The short answer is the signals from the Treasury market cannot be interpreted in the same fashion as the past because the broader economic context is very different. The unwinding of the Fed balance sheet may lead us back to such an interpretation at some point in the future, but it is not there now.

The article suggests alternative metrics, largely free of distortion due to monetary policy, that could be a better metric for oncoming recessions. This is intriguing, though my guess is that it is largely untestable with historical data. The simple fact is that circumstances now, the context of monetary policy, is distinct from prior eras and so even the same data source may not provide the same signal, or be subject to the same interpretation.

This also led me to think about some of my economic history work in private merchant credit mechanisms. It strikes me that government and private yield curves existed for a long time, and the coordination of movements in the curves, or the lack of coordination would be interesting to examine. Looks like I will need to head back to the archives to research that issue.


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