Before the 1980s recession, the yield curve inverted (the blue line is above the red line, signaling short-term rates are above long-term rates). After the recessions the yield curve widened, but then inverted about a year before the early 1990s recession.
After the 1990s, the yield curve widened out, but then tightened at the end of the decade. Also remember that at some time in the late 1990s the Treasury discontinued the 30-year bond.
On this chart, we again see the inversion prior to the recession, a post-recession widening out and a pre-recession inversion. Currently rates -- while tightening -- are still very wide.
Critics will argue that the Fed's current interest rate policy is distorting the curve. What they fail to consider is the Fed always distorts policy at the beginning of an expansion -- that's one of the primary causes of the interest rate spread widening at the beginning of an expansion. The other is traders selling the long-end of the curve as they move from safe assets (Treasury bonds) to riskier assets (stocks and commodities) in the anticipation of an expansion. While we have seen a flight to quality over the last three months which has tightened the yield curve, it is still pretty wide by historical standards.
