Consistent inverted yield curve for few months indicate recession. The same can also be drawn by way of 10 year yield minus 2 year yield and whenever line goes below 0 (short term yield > long term yield) is taken as indicator of recession. But central bank can always change the shape of curve with 'Operation Twist' . Central banks can sell long term bonds and buy short term bonds and hence increase yield on long term bonds and decrease yield on short term bonds. This way inverted yield curve can be changed back to normal looking upward curve and hence will hide the real recession indicator. How then one can rely in changes in yield curve?
Good question. Not every inversion was followed by a recession that means the predictive power of the yield curve is NOT as strong as one assumes. Operation twist further weakened that predictive power.
Yield curve without policy intervention will provide us an idea of how the public sees risk. With policy intervention like Central Bank managing the yield curve using Operating Twist will only be temporary.