A flattening yield curve only slightly increases the risk of a recession, and research by the Federal Reserve Bank of San Francisco suggests a one-in-three chance the yield curve inverts by yearend.
Using a term structure model, Jens H.E. Christensen, a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco, determined “the risk of a recession happening within the next year is slightly elevated — with around a one-in-three chance of a yield curve inversion within the next three months.”
Given the lag between a yield curve inversion and recession, he said, “this leaves a high chance that the current economic expansion will continue beyond June 2019 and become the longest in U.S. history,” Christensen wrote in an
The unusual low levels of long-term Treasury yields “is reflected in the estimated model dynamics,” and several possible explanations are offered including: “declines in the risk-free or natural real rate from low productivity or an aging population,” and quantitative easing, whereby central banks bought vast amounts of long-term assets following the financial crisis.
"In either case, U.S. long-term yields may react less to increases in U.S. short-term interest rates than past experience would suggest," Christensen noted. "All else being equal, such factors would make it more likely that an inverted
