Now as Traders are pricing in three half-point Federal Reserve rate hikes, the 30-year Treasury Yield has fallen below its five-year counterpart for the first time in a month.

There is no foolproof way to predict the economy’s behavior or recessions in particular. However it has been found the Treasury yield curve does a better job than most.

The yield curve is a graph charting interest rates against term to maturity, such as 1 year, 2 years, 3 years, 5 years, or ten years. It should slope upward normally, showing that longer maturities pay higher rates. Occasionally, however shorter maturities begin paying higher interest.

In the 11 recessions the United States has had since Word War II for which there is comparable interest rate data, the yield curve inversion has not been a perfect predictor. The first two recessions on 1953 and 1957 did not see yield curve inversions precede them. Before the 1960 recession, the 20-year to 3-month comparison inverted, however none of the other comparisons turned negative.

This comparison has also given false signals, inverting but nor being followed by a recession. The 10-year to 3-month comparison gave a false signal in September of 1966, which was followed three quarters later by a near zero GDP growth rate. Likewise in April of 1986, the curve inverted. No recession was forthcoming, however six months later GDP was well below normal. So even when there is a false signal, it is signaling a slowdown in economic growth is likely.

In 1969, there was a month of yield curve inversion, followed by five months of a positive slope. Then there was a more consistent inversion, and that accurately predicted the recession which began in January of 1970.

The general consensus is relying on a shorter period of yield inversions will result in a less reliable signal, however waiting for a longer period of inversions will reduce the length of the warning you will have.

If the yield curve in working, it can be expected to give an advance warning of a recession of about six to 16 months. The shorter 6 month lead time was seen in 1070 and 1973, while the longer lead time was seen more recently in 1990 and 2008.

We have just begun a short signal. So now should follow a period of waiting and watching.