EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.

The Headlines

The first week in April brought a slew of articles informing us that the yield curve had inverted, and with that, an increased chance of a recession on the horizon. In fact, the 2-year/10-year curve “inverted” on March 29 for the first time since 2019, and the 5-year/30-year inverted on March 28 for the first time since 2006. Given that we expect interest rates to be higher the longer the term of the debt, when the shorter term rates are higher than the longer-term rates, it is often a signal that something is amiss in the economic world. But just how worried should we be?

The following articles might help you and your students put this all in perspective with good background, explanations, and data. Here are the two key takeaways:

1) An inverted yield curve is a necessary but not a sufficient condition for a recession. In other words, every recession has been preceded by a yield curve inversion, but not every yield curve inversion has been followed by a recession. And these recessions, if they do develop, are quite delayed.

2) The Fed and other economists focus more on the nearer-term yield comparisons, like the 3-month/18 month or the 3-month/10-year. Neither of these inverted when the others did at the end of March, and in fact have steepened recently, demonstrating strength in the economy.

Resources

These first three articles offer a good introduction to inverted yield curves and their significance. They are not very long. Have students take 10-15 minutes to read these first.

• Reuters (3/29)
• CNBC (3/31)
• Compound Advisors (4/14)

Then have students read LPL Research article “10-Things to Know About Inverted Yield Curves” to get more detailed information. There are plenty of charts and graphs which help demonstrate the points made.  Then they should be ready to tackle the questions that follow.

Discussion Questions

1) Do recessions always follow an inversion of the yield curve? Can you find an example in an article or graph?

2) How long does it take following an inversion for a recession to begin, if it does?

3) Why do economists think a 3-month/18-month or 3-month/10 year inversion is a better predictor of a recession?

4) What did economists at the San Francisco Fed find about the 2/10 yield curve that is so often tracked?

5) Name two other things you leaved about inverted yield curves from reading these articles that you didn’t know before and that wasn’t already asked.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.