It is indisputable that an inverted yield curve is a powerful predictor for future recession. There are many theories to explain this empirical observation. I believe the reason for this is, if the yield curve is downward sloping it means the market expects the economy to worsen to the point that the central bank will have to intervene.
In 2006 – I worked as an economist at an Asset manager in Riga, Latvia – I concern myself with the link between the yield curve and real economic activity. I read an article by Jonathan H. Wright I was deeply impressed and inspired which my boss gave me. Using a probit model it was possible to predict recessions. Returning to Germany a few years later, I programmed an Excel Tool, which downloads public market data and estimates the probability of recession. I made the decision to migrate my old work to a web application when there is a need.
Probability of US Recession predicted by treasury spreads
Parameters estimated using data from January 1959 to December 2009, recession probabilities will be updated automatically.
The parameter estimates are \alpha=-0.5333 and \beta=-0.6330.