Comprehensive literature has emerged since the 1980s supporting the assumption that the yield curve is a reliable predictor of recessions by showing that (i) every U.S. recession after World War II followed after the yield curve inverted and (ii) the yield curve is a leading indicator since it calls recessions up to 18 months before they occur (Sabes & Sahuc, 2023). Currently, the U.S. economy isn’t showing any economic downturn contractions, although the 10- year yields have been consistently lower than two-year yields since the inversion in early July 2022.

The thesis includes an extensive literature review on yield curves and a summary of historical research on inverse yield curves. The second part of the thesis focuses on the comparative analysis, in which the three periods with negative term spreads are examined. Each period is analyzed for different economic indicators to assess their relevance and impact on the predictive power of yield curve inversions.

The key findings of our analysis show significant differences in the current economic environment. As measured by the NFCI, financial conditions have been consistently loose during the recent period of inverted yield curves. Term premia have declined over time, making yield curves more sensitive to short-term interest rate changes and potentially changing their predictive power. In addition, longterm inflation expectations are more stable and lower than in the past, which indicates high confidence in monetary policies. Furthermore, the yield curve has flattened due to balance sheet expansion, meaning that external factors have influenced traditional dynamics. We found further evidence in the personal savings rate and the robust labour market, supported by lower and less volatile initial jobless claims. Coupled with solid GDP growth and monetary and fiscal policies, the economy has remained remarkably resilient in the current phase. The traditional predictive power of the yield curve has evolved, and one should take into account the current economic indicators when interpreting the yield curve to gain a more comprehensive view of recession risks.