The risk of an imminent U.S. recession remains low despite the recent flattening of the U.S. yield curve, Fitch Ratings says. The underlying recession signals traditionally embodied by a yield curve inversion, namely high policy interest rates relative to long-term expectations of policy rates, and falling bank profitability and credit availability, are absent. Yield-curve flattening does nevertheless emphasize that the U.S. economic cycle is in a late stage of expansion. 

The yield curve has been a good lead indicator of U.S. recessions. Each of the past nine recessions were preceded by a yield curve inversion when 10-year yields fell below one-year yields. The recent narrowing of the 10-year minus one-year spread to its lowest level since summer 2007 has prompted a debate about potential economic implications. 

"The yield curve has not yet inverted except at some shorter tenors," Fitch said. "Our Global Economic Outlook forecasts suggest that to be unlikely. We forecast the U.S. 10-year yield to end this year at 3.1% from 2.85% today and predict a year-end Fed Funds rate of 2.5%. We also see both the Fed Funds rate and 10-year yields rising broadly in tandem through 2019. Even if the yield curve inverts, there are reasons to discount this as a 'red flag.'" 

The historical time lags between inversion and recessions have been highly variable, from six months to up to two years. The correlation between the yield curve and GDP growth has been far from perfect. While each recession has been preceded by an inversion, not every inversion has been followed by a recession. The relationship through the mid-1990s was very poor. Since early 2010 there has been a steady flattening while U.S. growth has remained broadly stable. 

The yield curve has not yet inverted except at some shorter tenors. Fitch forecasts suggest that to be unlikely.

"We forecast the U.S. 10-year yield to end this year at 3.1% from 2.85% today and predict a year-end Fed Funds rate of 2.5%. We also see both the Fed Funds rate and 10-year yields rising broadly in tandem through 2019. Even if the yield curve inverts, there are reasons to discount this as a 'red flag.'"

The historical time lags between inversion and recessions have been highly variable, from six months to up to two years. The correlation between the yield curve and GDP growth has been far from perfect. While each recession has been preceded by an inversion, not every inversion has been followed by a recession. The relationship through the mid-1990s was very poor. Since early 2010 there has been a steady flattening while U.S. growth has remained broadly stable.