Yield curve. The "yield curve" is commonly defined as the yield on 10-year government bonds less the interest rate on 90-day commercial paper. An inverted yield curve is taken as a signal that credit conditions are tight and monetary authorities are trying actively to discourage borrowing. The typical reaction to tightened credit conditions is that capital spending and housing weaken--developments now underway:
--Since 1970, there have been six episodes when this measure of the yield curve has been inverted for at least nine months, and all were followed by recessions.
--The lag between the beginning of the yield curve inversion and the onset of recession ranged from three to six quarters.
--The present yield curve inversion began in July 2006, meaning that if the yield curve remains inverted through the end of March 2007 a "recession watch" would start.