World of Government Bonds has this interesting page which notes all inverted yield curves to date. Below are the S&P ratings from A to AAA to date.
Source: World of Government Bonds, accessed 03/14/2023.
What does that mean? In Chinn and Kucko (2014), we examined the relationship between the gap between ten-year and three-month terms and recessions, as defined by ECRI (by NBER for the United States). Using interest rate data through 2021M12, here are the results for predicting recessions one year ahead. We noted that not all countries showed a reliable relationship between the 10-year-3-month gap and the recession the following year. Here are some preliminary results of the work carried out with Laurent Ferrara, updating the data to 2021M12 (for interest rates), assuming that no recession started in these countries in December 2022.
Table 1: The recession probit regression results are one year ahead of the duration gap and the 3-month interest rate (as a decimal). Bold type indicates significance at the 5% level. Source: Author’s calculations based on OECD interest rate data, ECRI recession dates (except for US, which uses NBER dates).
Although there are a good number of significant entries for the term spread across all countries, the sign is wrong for Italy. Even when the coefficient is significant, the pseudo-R2 is low (UK and, to a lesser extent, France). This means that the term spread only really seems useful for Canada, Germany and the United States.
Here are the simple predictions for Canada (not including the 3 month interest rate) and for Germany. Note, however, that the last observation is the predicted probability for December 2023; the odds for March 2023 (now) are pretty low either way. (However, false negatives are fairly common, unless fairly common for Canada, unless a low threshold is used.)
Figure 1: Probability of recession in a given month from the recession probit on the spread of Canadian 10-year-3-month terms. Canada ECRI peak to trough recession dates shaded. Source: OECD via FRED, ECRI and author’s calculations.
Figure 2: Probability of recession in a given month from a probit recession on the spread of German 10-year-3-month terms. The dates of ECRI’s peak-to-trough recessions in Germany are shaded in grey. Source: OECD via FRED, ECRI and author’s calculations.
This is also true for the United States, where the estimated probability of a recession does not exceed 50% until December 2023/January 2024. On the other hand, the 10-year-3-month spread places the highest probability for the recession 2020M02-04 to 2020M08.