I love economic phenomenology. Finding abnormal states and making predictive guesses based on them seems like a blast to me.
So, of course, like a good little b-school grad, I've been watching the interest rate inversion carefully. More for the reactions of the many experts in the financial world than any real expectation that it will tell me what's about to happen.
For the uninitiated, short term interest rates (the return you'd get on say a 3 month term) are usually lower than long term rates. This is because your money is tied up for less time and therefore there is less risk of something adverse happening.
Intuitively this should be fairly easy to follow. There is a greater chance of some large upheaval causing problems with money you have "at risk" for 30 years than money you have "at risk" for 30 days. Therefore, the return (interest rate) should be higher to compensate you for the risk. The more risk I want you to take the more return you will want in compensation. Finance 101, really.
The various returns versus time of maturity for debt make up the interest rate curve. Presently the shape of that curve is "inverted." That is, short term rates are actually higher than long term rates. This is an unusual circumstance, and one that many have argued predicts a recession.
Of course, not everyone thinks so. No less than former Fed Chairman Alan Greenspan has pooh-poohed the ability of the yield curve to do any signaling. According to him the economy is too complex now for it to be of any use.
If you're still interested, there's more than you could ever want to know about interest curves out there. Start with Potters, Bouchad, Cont, et. al. "Phenomenology of the Interest Rate Curve." From the abstract:
This paper contains a phenomenological description of the whole U.S. forward rate curve (FRC), based on an data in the period 1990-1996. We find that the average FRC (measured from the spot rate) grows as the square-root of the maturity, with a prefactor which is comparable to the spot rate volatility. This suggests that forward rate market prices include a risk premium, comparable to the probable changes of the spot rate between now and maturity, which can be understood as a `Value-at-Risk' type of pricing. The instantaneous FRC however departs form a simple square-root law. The distortion is maximum around one year, and reflects the market anticipation of a local trend on the spot rate. This anticipated trend is shown to be calibrated on the past behaviour of the spot itself. We show that this is consistent with the volatility `hump' around one year found by several authors (and which we confirm). Finally, the number of independent components needed to interpret most of the FRC fluctuations is found to be small. We rationalize this by showing that the dynamical evolution of the FRC contains a stabilizing second derivative (line tension) term, which tends to suppress short scale distortions of the FRC. This shape dependent term could lead, in principle, to arbitrage. However, this arbitrage cannot be implemented in practice because of transaction costs. We suggest that the presence of transaction costs (or other market `imperfections') is crucial for model building, for a much wider class of models becomes eligible to represent reality.
If you are still hungering for more after that work you are a true bond lover. Meanwhile, hemlines, the world series, and cardboard box sales are still probably better prediction tools.