Inverted Yield Curve (Part 3) - Is a Recession an Inevitable Future? (1974, 1970, 1961 and exception!)

Intro: An Inverted Yield Curve and Recession

If you don’t yet know what an inverted yield curve is and why it’s often discussed in connection with a recession, please refer to Part 1 using the link below.

➤➤ Inverted Yield Curve (Part 1) - Is a Recession an Inevitable Future? (2020, 2008, 2001)

Now, let’s continue by examining past precedents of yield curve inversions and recessions in the U.S. during the 1970s and 1960s.

(7) 1974–75 Recession and Inverted Yield Curve

Source: www.newyorkfed.org

• Recession period: approx. 16 months (December 1973 – March 1975)  
• Duration of inversion: approx. 18 months (June 1973 – November 1974)  
• Time from inversion to recession: approx. 6 months  
• Time from yield curve normalization to recession: approx. -11 months  

The shaded area marks the recession period. Here too, a yield curve inversion occurred, followed by a recession, similar to cases in 1980 and 1981, where the order was: yield curve inversion ➜ recession ➜ yield curve normalization.

So, what caused the 1973–74 recession? Key factors included high inflation in the early 1970s, the Federal Reserve's high-interest-rate policy, and most notably, the first oil shock (OPEC’s oil embargo during the Yom Kippur War in October 1973, which caused oil prices to quadruple).

Does this sound familiar? The soaring inflation from 2021 until recently, the Federal Reserve’s high interest rates, and the rising tensions between Israel, Iran, and their allies (Iran’s so-called axis of resistance) bear similarities. However, the severity of inflation, Fed’s high interest rate policy, and the Middle East conflicts were much greater in the 1970s.

(8) 1970 Recession and Inverted Yield Curve

Source: www.newyorkfed.org

• Recession period: approx. 11 months (January 1970 – November 1970)  
• Duration of inversion: approx. 15 months (December 1968 – February 1970)  
• Time from inversion to recession: approx. 13 months  
• Time from yield curve normalization to recession: approx. -1 month  

Once again, a yield curve inversion occurred, followed by a recession. The sequence was: yield curve inversion ➜ recession ➜ yield curve normalization. The score is now tied at 4:4 when comparing whether inversion or recession comes first. However, it’s important to highlight that in the most recent four cases, yield curve normalization preceded the recession, while in the earlier four cases, the order was reversed. So, I will place more importance on the recent cases, maybe because the Federal Reserve has learned from the past and increasingly tends to act sooner in anticipation of a recession (so yield curve normalization takes place prior to the recession occurring.)

Though the 1970s are often seen as the era of inflation, its roots lay in the 1960s, as I’ve mentioned before. The ongoing and expensive Vietnam War, the U.S. government’s large-scale welfare programs, and rising inflation all contributed to the 1970 recession.

(9) 1961 Recession and Inverted Yield Curve – A Single Exception

Source: www.newyorkfed.org

• Recession period: approx. 10 months (May 1960 – February 1961)  
• Duration of inversion: 0 month (the spread narrowed to a low of 0.09% in December 1959)  
• Time from inversion to recession: N/A (approx. 5 months from December 1959)  
• Time from yield curve normalization to recession: N/A (approx. 5 months from December 1959)

We have finally found an exception! A recession occurred without a preceding yield curve inversion. However, it’s worth noting that the spread narrowed to nearly zero (0.09%) in December 1959. We cannot completely rule out the possibility that the inversion lasted for more than a few days during that month, although exact data on a daily basis is hard to come by. Nevertheless, based on monthly data, we consider this a half-exception.

The key takeaway is that, since 1959, this is the only case where a recession occurred without a preceding yield curve inversion. (I can’t find reliable data before 1959.)

The next question is: Is yield curve inversion a necessary condition for a recession, but not a sufficient one? To confirm this, we need to check if there was a case where a yield curve inversion occurred but no recession followed.

(10) 1966 Yield Curve Inversion – A Single Exception

Source: www.newyorkfed.org

• Recession period: 0 months  
• Duration of inversion: 6 months (September 1966 – February 1967)  
• Time from inversion to recession: N/A (approx. 40 months from September 1966)  
• Time from yield curve normalization to recession: N/A (approx. 35 months from February 1967)

The 1961 case was a sole exception where a recession occurred without a yield curve inversion. In contrast, the 1966 case was a sole exception where a yield curve inversion occurred, but no recession followed.

In January 1966, the spread between the 10-year Treasury and the 3-month Treasury briefly turned negative by -0.01%, but quickly reversed, so this point wasn’t counted as an inversion. However, in September 1966, the spread turned negative again and remained so until February 1967. Another inversion occurred in December 1968, but it lasted until February 1970, and these periods were far enough apart to be considered separate events.

Ultimately, the 1966 case stands as the only exception since 1959 where a yield curve inversion occurred without a subsequent recession. Therefore, we can conclude that yield curve inversion is not a sufficient condition for a recession.

This concludes today’s discussion. In the next and final part of "Inverted Yield Curve" series, I will summarize the data we've found so far and wrap up. I’ll also attempt to answer the crucial question: "The yield curve is currently inverted -does that mean a recession will occur soon? If so, when, and how long will it last?"

Thanks for reading. Wish you grow rich slowly and surely!

This blog does not offer investment, financial, or advisory services. The information provided herein is for general informational purposes only and should not be interpreted as advice for making specific investment decisions. All investments involve risk, and past performance is not indicative of future results. It is advisable to consult with a qualified financial advisor to determine strategies or products that are appropriate for your individual circumstances.

The owner, writer, or operator of this blog accepts no responsibility for any direct or indirect losses that may arise from the use of or reliance on the content presented. The information provided on this blog is subject to change and may not be current. The content is based on personal opinions, as well as information from news sources and research, and may vary due to shifts in personal opinions, financial market conditions, or other influencing factors.

Most data referenced is derived from daily closing prices. Data finding, sorting, graphing, and analysis are performed primarily by myself, and while efforts are made to ensure accuracy, errors may be present. If you identify any inaccuracies, please inform me via comments or email, and I will endeavor to review and correct them as necessary. External content or images will be cited to the best of my ability.