This Graph has Predicted Every Recession since 1976. What It’s Telling Us Now.

What if I told you that a single graph predicted the COVID Pandemic and every recession in the past 50 years. In August 2019, movements in one of the most closely watched ‘recession indicators’ rang the warning bell that some paid attention to, and others brushed off. After all, who would’ve thought that a global pandemic would ensue?

What is the Yield Curve?

Known as the yield curve, it’s a line plot chart that graphs out the yield, or interest rate, of U.S. Treasuries at different maturities (the date when the principal investment must be paid back in full).

The U.S. government finances some of its day-to-day operations by issuing debt. This debt will have different maturities and is backed by the full faith and credit of the United States government.

While all securities will come with some risk, investors of Treasuries are guaranteed the return of their principal investment and interest if they hold them to maturity.

During ‘normal’ economic times, a yield curve will look something like the graph below, where shorter-term Treasuries will have a lower yield than longer-term Treasuries.

After all, there should be larger rewards for holding a treasury longer.