It's All About the Timing: 2020 and US Recession Probabilities
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So the US yield curve has inverted in earnest. Inverted yield curves, and compression of term spreads in general, predict US recessions. This is because bank earnings are a linear function of the term spread — their business model is to borrow short and lend long. When spreads get compressed, the present value of future bank earnings falls along with forward-looking measures of banks' net worth. Banks therefore must shed risk, yielding a contraction of bank lending, and thus a slowdown in the real economy. This is the original risk-taking channel of
It's All About the Timing: 2020 and US Recession Probabilities
It's All About the Timing: 2020 and US…
It's All About the Timing: 2020 and US Recession Probabilities
So the US yield curve has inverted in earnest. Inverted yield curves, and compression of term spreads in general, predict US recessions. This is because bank earnings are a linear function of the term spread — their business model is to borrow short and lend long. When spreads get compressed, the present value of future bank earnings falls along with forward-looking measures of banks' net worth. Banks therefore must shed risk, yielding a contraction of bank lending, and thus a slowdown in the real economy. This is the original risk-taking channel of