Have Yield Curve Inversions Become More Likely

The recent flattening of the yield curve has raised concerns that a recession is around the corner. Such concerns stem partly from the fact that yield curve inversions have preceded each of the past seven recessions. However, other factors affect the yield curve's shape besides the expected future health of the economy. In particular, a low term premium — as has been observed in recent years — makes yield curve inversions more likely even if the risk of recession has not increased at all.