Ahmed and Chin (2023)co-authored with Rashad Ahmedaccepted by JMCB. The U.S. and foreign 10-year-3-month inversions are still deep (although not as deep as last time I saw them in March) release).
figure 1: U.S. 10-year 3-month spread (blue), GDP-weighted foreign (Canada, Germany, Japan, UK) 10-year 3-month spread (tan), 5-year to March-10 remaining advances Term spread countries (light green), NBER-defined recession peak-to-trough dates shaded gray. Source: Federal Reserve through FRED, OECD, Dallas Fed DGEI, NBER and author's calculations.
Historical relevance, as stated Ahmed Chin, using the foreign term spread indicates a very high probability of a recession.Note that while debt service ratios are quite low and therefore recession forecasts are driven by deep reversals, as debt service ratios increase the norms also strengthen (e.g. Ferrara(2023)) is still very likely to cause a recession (almost 100% by mid-2024).
I always add the caveat that conclusions depend on the establishment of historical correlations. Things may be different this time, with (1) term premiums incorporating changes in inflation risk, (2) forward guidance coming into play, (3) different lags between foreign and U.S. term spreads, etc. (only For models based on term spreads).
