Generally when markets consider the impact of an inverted yield curve, this is in the context of 2 year vs. 10 year or 5 year vs. 30 year Treasuries. These are viewed as more meaningful signals than inversions on the short end of the curve as longer maturity Treasuries reflect market expectations of growth and inflation, thus a decline in these rates below shorter rates are seen by the market as negative indications about future growth and inflation.
That being said, the 2‐year versus 10‐year curve, while not inverted, has flattened to around 10 basis points, its flattest level since 2007. This is meaningful and worth watching.
Our U.S. Fixed Income team discussed the potential implications, both real and perceived, of yield curve inversion in their paper titled Bond Avengers: QE Infinity War released in August. The team notes that, historically speaking, the momentum of yield curve inversion has been an ambiguous signal about market direction and that near‐term market reactions have been relatively benign for fixed income.
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