Application of the Yield Curve Inversion Indicator to Determine the Current Phase of the Stock Market

Abstract

Purpose: To establish the possibility of using the indicator of the inversion of the difference in the yield curve of 10-year and 2-year US Treasury bonds to determine the current phase of the stock market, predict the future direction of market movement and improve the efficiency of managerial investment decisions. Design/Method/Approach: The following methods were used when writing the paper: empirical – to carry out experimental checks of the revealed regularities; graphic - for a visual presentation of research results; systematization and generalization - for generalization of scientific concepts, developments, and proposals; statistical - to implement a quantitative approach to studying data. The US stock market was chosen as the base for research. The research was carried out by statistical processing of data on the value of the indicator of the inversion of the yield curve difference of 10-year and 2-year US Treasury bonds and the Standard & Poor's stock market index - 500 for the period from 1989 to 2022. Findings: It has been established that the indicator of the difference of the yield curve of 2-year and 10-year US Treasury bonds is a fairly reliable tool for determining the approaching recession in the economy, but at the same time it is not possible to determine the exact time of the recession. It is shown that this indicator is expedient to use for early warning about a possible fall in international stock markets. At the same time, it was found that not every inversion of the yield curve is followed by a fall in the stock market, but every fall is preceded by an inversion. It was noted that the current dynamics of the yield curve are signaling a possible significant drop in the US stock market in the near future. Theoretical Implications: Establishing the peculiarities of the indicator of the inversion of the yield curve difference of 10-year and 2-year US Treasury bonds in the conditions of the modern economy. Practical Implications: The practical application of the research results will allow us to more accurately determine the current phase of the international stock markets and receive early signals about the future decline of the markets, which will contribute to increasing investment efficiency. Originality/Value: This study expands knowledge about the peculiarities of the use of the indicator of the yield curve difference of 2-year and 10-year US Treasury bonds when determining the likely onset of a recession in the economy and the possibility of a fall in international stock markets, offers an updated model of the use of this indicator when forecasting the direction of movement of international stock markets. The results of the research may be of interest to specialists who work in the field of investing in international financial markets. Research Limitations/Future Research: The results of the work presented in this article create a basis for conducting similar research on the possibility of using other indicators in order to increase the accuracy of establishing the moment of recession in the economy or the beginning of a fall in international financial markets. From the author's point of view, first of all, such indicators as the movement of gold prices, the dynamics of changes in the Fed's discount rate, and Buffett’s indicator should be studied. This will make it possible to develop an effective application mechanism for making investment decisions and will contribute to increasing investment efficiency. Paper Type: Empirical JEL Classification: E44, F21, G15