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No, the inversion of the US yield curve between 5- and 30-year maturities doesn’t forecast a recession, contrary to what every financial publication in the English language has been saying.

Yes, the yield curve inverted before the 2008 recession. This time is different. The difference is obvious if we separate the yield curve into “real” yields and inflation expectations.

Treasury Inflation Protected Securities, or TIPS, protect investors against inflation (or at least against increases in the Consumer Price Index, the US government’s flawed measure of inflation), by boosting the payout of principal by the increase in the CPI over the maturity of the note. The difference between the 10-year Treasury yield of 2.46% and the 10-year TIPS yield of negative 0.52%, or about 3%, is the inflation rate at which an investor in TIPS and an investor in ordinary coupon Treasuries will break even. It’s called the “breakeven inflation rate.”

An inverted yield curve (short-term interest rates are higher than long-term interest rates) is supposed to mean that investors expect lower economic activity in the future and hence lower interest rates. That’s what it meant back in 2007.

Today, it means that investors think that inflation will be much lower in the future than it is now. The breakeven inflation slope is sharply negative. Meanwhile, the real yield curve is positive. That’s the opposite of what we saw in 2007.

If investors really expected a recession, they would also expect the Fed to cut interest rates, or at least hold them steady at today’s low levels. But the TIPS curve says that the market expects Fed tightening – which won’t happen if the economy falls into recession.

That doesn’t exclude the possibility of a recession, to be sure. Consumers might balk at higher prices and stop spending, and the Fed’s gradual squeeze on interest rates might pop the US housing bubble. There are some signs of squishiness in consumer spending. The widely followed University of Michigan Consumer Confidence Index has fallen almost to the 2008 recession lows.

But that has nothing to do with the yield curve viewed properly, that is, as two curves – a real interest rate curve and an inflation-expectations curve.