U.S. Bond Yields and Recessions – a Historical Perspective

Equity vs Bond Income

Market observers have noted the recent long-term government bond yields below dividend yields. However, looking back on nearly 150 years of data (using methods from Robert Shiller’s Irrational Exuberance), prior to the 1960s, investors most often received higher income from dividends than on long-term government debt (shaded range indicates when dividend yield is higher than 10-year treasury yield). Is this a return to the old normal?


A Closer Look at Yield Curve Inversions

Following methods from Robert Shiller’s Irrational Exuberance, Macrobond has produced a century of (monthly average) yield curve data for the United States . This provides greater historical context for one of the most commonly cited recession indicators. During the liquidity trap years of the Great Depression and the post-war government drawdown, recessions occurred without an inverted yield curve. However, looking back over 100 years, it is hard to find clear examples of false positives: A recessions has occurred subsequently (or concurrently) to every 3m-10y inversion in the last 100 years. Is this time different?


Examining all spread combinations for the United States yield curve offers a deeper view of the yield curve’s ability to predict recessions. Both the total number of inverted pairs and certain pair combinations (eg Mid-Short) seem to be more reliable recession indicators than others. At present the percent of the yield curve pairs inverted is at 60%. The Mid-Short combinations are also largely inverted.


*Today’s charts and commentary by Macrobond’s Tarek Saed, Wadsworth Sykes, & Alex Pelle.

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