It can be difficult to predict when a recession will occur. A probable economic slowdown can be detected by closely monitoring the stock market, unemployment rate, and consumer confidence.
Bond yields are another important indicator of a potential recession.
The yield on a 10-Year Treasury Note (US10Y) is closely watched along with the 3-Month Treasury Bill (US3M) to forecast the next recession.
The Yield Curve
One method that economists use to predict the next recession is using the yield curve as a leading indicator. Some of you may know it as the “term spread.”
This model uses the difference between the 10-year and 3-month Treasury rates to calculate the likelihood of recession 12 months ahead.
In ThinkorSwim, you can analyze this data by looking at the ticker symbol T10Y3M on your chart.
I’ve turned this chart into a simple Yield Curve indicator to help you compare the data alongside the S&P 500 Index.
Yield Curve Recession Indicator for ThinkorSwim
# Indicator Name: Bond Yield Recession Indicator
# Version: 1.0.0
# Developer: Melvin C.
# URL: https://thinkscript101.com/yield-curve-recession-indicator-thinkorswim/
plot data = close("T10Y3M:FRED");
plot zero = 0;
This indicator is very simple to use and analyze.
When you import the code above into ThinkorSwim, the study sits at the lower section of your chart.
The blue line represents the difference between the 10-year and 3-month Treasury rates, while the red line depicts the zero line.
Look for the Yield Curve (blue) crossing below the zero line. It is often a warning sign that a recession may happen soon. Historically, the estimated time is 12 months from when the signal occurs.
The Yield Curve indicator has successfully predicted the 2000 and 2008 recessions. And most recently, the stock market crash of 2020.
If you want to review the historical performance of the Yield Curve indicator, you need to add the study to your SPY (S&P 500) chart.