Inverted Yield Curve (Part 2) - Is a Recession an Inevitable Future? (1990, 1981, 1980)

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 1980s and 1990s.

(4) 1990 Recession and Inverted Yield Curve

Source: https://fred.stlouisfed.org

• Recession period: approx. 7 months (July 1990 – February 1991)  
• Duration of inversion: approx. 7.2 months (May 24, 1989 – December 28, 1989)  
• Time from inversion to recession: approx. 13.3 months
• Time from yield curve normalization to recession: approx. 6.1 months  

As you can see in the graph, the 10-year to 3-month yield spread briefly turned positive between July and August 1989 before turning negative again. After considering how to measure the duration of the inversion, I decided to include this brief positive period because it lasted only a short time and the yield difference was between 0 and 0.3%. Therefore, I extended the inversion period to December 1989. Once again, the inversion was followed by a recession. After  observing this pattern four times, one might start to wonder if it's a rule (spoiler alert: you'll soon find out that it's not.)

The recession of 1990 occurred due to several factors: the Federal Reserve’s high-interest rate policy, the collapse of the commercial real estate bubble, the savings and loan crisis of the 1980s, and the restructuring of companies burdened by high debt levels from aggressive acquisitions and investments during the 1980s. However, the decisive blow came in August 1990 when Iraq invaded Kuwait, sparking the Gulf War and causing oil prices to soar. Although the recession technically began one month earlier, the Gulf War undoubtedly intensified its severity.

So far, I've been using data from the Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org/series/T10Y3M), but their data only goes back to January 1982. Instead, I’ll use data from the Federal Reserve Bank of New York from now on (https://www.newyorkfed.org/research/capital_markets/ycfaq#/). While the St. Louis Fed data is daily, allowing for more detailed analysis, the New York Fed data is monthly. Nevertheless, thanks to the New York Fed, I now have five additional cases to examine.

(5) 1981-82 Recession and Inverted Yield Curve

Source: www.newyorkfed.org

• Recession period: approx. 16 months (August 1981 – November 1982)  
• Duration of inversion: approx. 12 months (October 1980 – September 1981)  
• Time from inversion to recession: approx. 10 months  
• Time from yield curve normalization to recession: approx. -1 month  

There was a slight variation this time. While the inversion occurred before the recession, the order was different: yield curve inversion ➜ recession ➜ yield curve normalization, rather than inversion ➜ normalization ➜ recession. The inversion was resolved about a month after the recession started.

Why did the 1981–82 recession occur? Major reasons are extremely high inflation in the 1970s (due to the Vietnam War and two global oil shocks), the Federal Reserve’s aggressive interest rate hikes in the late 1970s (led by the legendary Paul Volcker), falling home prices, and a decrease in consumer spending. It was one of the longest and deepest recessions since World War II.

(6) 1980 Recession and Inverted Yield Curve

Source: www.newyorkfed.org

• Recession period: approx. 6 months (February 1980 – July 1980)  
• Duration of inversion: approx. 18 months (November 1978 – April 1980)  
• Time from inversion to recession: approx. 15 months  
• Time from yield curve normalization to recession: approx. -2 months  

Again, the inversion was followed by a recession, but similar to the 1981 case, the order was yield curve inversion ➜ recession ➜ yield curve normalization. The inversion was resolved about two months after the recession began.

Interestingly, after the 1980 recession ended in July, another recession started just 13 months later in August 1981. The 1970s were marked by inflation, and the early 1980s were no easier. The reasons for the 1980 recession were largely similar to those for the 1981 recession, given the short one-year gap between them. It seemed like the economy had barely recovered from the 1980 recession when another one hit 13 months later.

I will conclude Part 2 here. In Part 3, I will cover the remaining three yield curve inversion cases. Then, I will return to 2024-25 in Part 4 to share my thoughts on the probability and timing (if it occurs) of any upcoming recession.

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

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