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Term Spreads May Not Be Informative In Forecasting A Recession Or Bear Market

Michael Harris profile picture
Michael Harris


  • Practitioners focus on the difference between 10-year and 2-year yields.
  • Academic studies mostly use the difference between 10-year yields and the three-month rate.
  • Both term spreads have normally moved in sync, but this year, they show a wide divergence.
  • Those who look at the term spreads to forecast recessions are possibly fooled by randomness.
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It's known that an inversion of the yield curve as measured by practitioners based on the difference between the 10-year and 2-year yields (T10Y2Y) has occurred before all six recessions since 1976 but has generated a false signal in mid-1960s.

This article was written by

Michael Harris profile picture
Ex-fixed-income quant. Ex-hedge fund quant trader. Worked on developing bond portfolio optimization software and trading systems for commodities and stocks, as a trader for a hedge fund. Author of "Short-Term Trading with Price Patterns" (1999), "Stock Trading Techniques with Price Patterns" (2000), "Profitability and Systematic Trading" (2008), and "Fooled By Technical Analysis" (2016). Michael Harris holds a Master's degree in Operations Research, with an emphasis in forecasting and financial engineering, and another Master's degree in Mechanical Engineering. Website: www.priceactionlab.com

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