OPINION: At most, what has happened to the yield curve over the last month increases the odds of a recession by a few percentage points.
That’s important to keep in mind, given the huge amount of attention the yield curve has received over the last couple of weeks. Based on the frenzy of Chicken Little pronouncements earlier this week, you’d think the economy is about to collapse because the yield curve briefly inverted this week, when the 2-year Treasury yield rose above the 10-year yield.
For their study, the professors defined the yield curve as the difference between the yields on the 10-year and 90-day Treasurys. Based on the econometric model they constructed, the current yield curve translates into a recession probability of less than 5%. This is illustrated in this chart: By no means is the Estrella/Mishkin study the only or the last word on the subject of the yield curve, which has received an enormous amount of academic attention over the last couple of decades.
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