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The chart that predicts recessions

Why does it matter when this curve changes?

A recession might be coming. Some investors believe it’s on the way because there’s a chart that has predicted every recession in the past half-century — and it’s starting to predict another one.

The chart visualizes the amount of money you can make on US bonds.

When the government wants to borrow money, it can sell bonds. It’s basically an agreement saying that if you give the government money now, they’ll pay you back — with interest. But here’s the important part: The longer you agree to let the government keep your money, the higher the interest rate. So you make more money.

That’s why this chart usually points upward, like this:

This is called the “yield curve.” But sometimes, this chart does something like this:

This is what investors call “inversion.” It isn’t normal.

In fact, shortly before every recession in the past half-century, this is what happened. And it happened again in August 2019.

In the video above, we set out to do three basic things:

  • Visualize the yield curve for every month in the past half-century, to show just how much predictive power it has.
  • Explain why the curve inverts.
  • And explain why the inversion has preceded so many recessions.

But the really short version is: It’s treated as a thermometer for how investors are feeling about the economy two years out. And when investors aren’t feeling great about it, sometimes it can be a self-fulfilling prophecy — and help bring on a recession.

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