Do Foreign Yield Curves Predict U.S. Recessions?

This note shows that non-U.S. yield curves contain information about future U.S. recessions and economic activity. Using quarterly data from 1979-2021, a foreign term spread constructed from the bond yields of G-7 constituents is included in regressions of U.S. recession risk and U.S. real GDP growth. Like the U.S. term spread, U.S. recession risk rises and real GDP growth slows as foreign term spreads narrow and this predictability arises from the presence of both global factors and cross-border spillovers. The results also imply that not all U.S. yield curve inversions are alike. A flatter U.S. yield curve coinciding with flatter yield curves abroad indicates greater U.S. recession risk than a flatter U.S. yield curve in isolation