Why the yield curve inversion isn't different this time

At the end of 2005, the US yield curve inverted for the first time since 2000. In the past, this has been a useful predictor of coming recession, but many analysts argue that it's different this time. But that's exactly what a lot of people said in 2000, says Paul Kasriel in The Econtrarian newsletter - right before the recession of 2001.

In the waning trading sessions of 2005, the yield spread between the Treasury 10-year security and the Treasury 2-year security inverted slightly. That is, on some occasions, the yield on the 2-year was slightly above that on the 10-year.

The inversion of this yield spread preceded the recessions of 1980, 1981, 1990 and 2001. A number of analysts, including Fed Chairman Greenspan, have said that it's different this time a yield-curve inversion in the current environment does not have the same kind of future economic growth implications as in past cycles. In a December 19, 2005 commentary, I noted that since 1966, a yield curve inversion (referring to the yield spread between the Treasury 10-year and the fed funds rate) seemed to be a necessary condition for a recession, but not a sufficient condition. That is, minor inversions did not necessarily signal the near-term onset of recession.

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