Recession Without an Inverted Yield Curve? Sure, Why Not?


Japan had six consecutive recessions without an inverted yield curve. There is no reason it can't happen here.

The above chart shows the last six recessions. I do not believe any points of the curve inverted but I only show short-term rates and the 10-year rate. I believe portions of the yield curve did invert in the 1989-1990 recession when the Japanese stock market bubble burst.

On My Radar

I received an "On My Radar" email from Steve Blumenthal at CMG Wealth on the Risks Inherent at the End of a Long-Term Debt Supercycle. Here's the pertinent clip.

“One last thing – as for this debate about the yield curve needing to invert to warrant a recession call, the reality is that at the ultra-low levels of rates, bloated central bank balance sheets that are in the process of gradually unwinding, and in the face of record volumes of debt outstanding, you do not need to see curve inversion. Japan is the template – each of its last four recessions occurred with the yield curve still positively sloped!

The U.S. bubble is not in real estate credit this cycle, but the chart of corporate debt to GDP today looks a whole lot like the chart of mortgage debt/GDP just over a decade ago. There will be a price to be paid, in a tightening Fed policy environment, for creating a bubble condition such that half of the investment-grade corporate bond market today is one notch away from being downgraded to junk.

According to Moody’s, leveraged loan covenants are now the weakest they have ever been. Expect to hear the terms “fallen angels” and “destruction of value” in the next year or two (perhaps why having some dry powder on hand right now is going to pay off big time as the credit cycle shifts into reverse).”

The source of that quote is actually David Rosenberg, “Breakfast with Dave” (July 26, 2018).

Japan Nearing Recession Again

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In the first quarter of 2018, Japanese GDP was -0.2%.

Don't think that cannot happen here.

Mike "Mish" Shedlock

Comments (6)
No. 1-5

Of course you can have "recessions" without yield curve inversions.

No matter what I'm up to personally, if I go to the bank to get a loan for something, I'll pay more for longer durations. Ergo, my yield curve will bever be "inverted."

Which in no way means I can't somehow decide to work less, produce less and earn less this year than last, preferring to take a vacation instead. As in, experience a "recession."

And, things don't magically change one lick, if I decide to hole up behind sandbags and declare my lot a sovereign nation, myself as it's "elected leader" and the rest of currently fashionable brouhaha.

The above musings may seem awfully contrived, but they do illustrate why pretending economics is some sort of empirical discipline will never amount to more than simpletonian folly: The elements economics deal with, are never constant.

That someone can find some arbitrary measure or graph, that looked similar to today at some other point in time, means nothing. As rational, optimizing individuals are never the same as they were a second ago. They don't aggregate the same as the did a second ago. The mere fact that the above mentioned graph is now even conceptually available, means that every atom in the entire Econoverse has adjusted its behavior to account for that. As well as to account for the adjustment of every other atom. And so forth and so forth.... So they are no longer the same atoms as they were last second. Much lest last decade.

If atoms in physics behaved the same way, physics wouldn't be an empirical discipline either. The only difference being, physicists are generally sufficiently intellectually astute that they would then quit pretending it was. Rather than insisting on covering their eyes like ostriches, and hoping noone notices the entire foundation of everything they do, is nothing more than pure childish baloney and nonsense. And that, whenever this becomes too obvious, government needs to step in and bailout their childish illusions.


In the past an inverted yield curve meant something. But now that central banks own a much higher pct of outstanding debt and don't care about profiting from their holdings, the yield curve will rarely invert.


It does matter. How does a bank make money when one year dollar LIBOR is 2.82% and the yield on 10 year treasuries is 2.95%. As Northern Rock in the UK discovered, when short term money market rates spike and mortgage rates are low you no longer have a business model and can provide credit.


The US experienced several recessions in the 20th century without a yield curve inversion: 1937, 1945, 1949, 1953, 1958, 1960.


What we may get is the first recession ever without negative GDP growth. The Mockingbird Media will simply declare a recession is imminent prior to the mid-terms.

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