Yield Curve Flattening and Recession: 1920 - October 2020.

It is said that the surest predictor of recession is a flat yield curve, i.e., when short-term interest rates and long term interest rates are approximately equivalent (see the 1966-2008 period in the graph below). Some will point out recent aberrations in this conventional wisdom, as in 1966-67 when a Three-Month yield at 100% of the average Ten Year Treasury yield was not followed by a recession - at least immediately - and argue that a recession does not always follow a flattened or nearly flattened yield curve.

Graph note: Three month secondary market yield spliced at October 1941 to the prior three plus six month measure with a 19 basis point (.19 yield) differential, average Long-Term United States Bonds spliced at January 1953 to Ten-Year Treasury with a 5 basis point (.05 yield) differential. Yield measures are monthly averages.