Implications Of An Inverted Yield Curve

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With the Federal Reserve (Fed) continuing to hike interest rates, the probability of a sustained inversion in the yield curve is on the rise. Historically, an inverted yield curve, a common phenomenon late in an expansionary cycle, has been one of the leading indicators of a looming recession. An inverted curve can have negative implications for the economy, specifically tightening lending conditions; however, the implications for risk assets are not always clear. Given the Fed’s aggressive pace of hikes and current market dynamics, we believe investors should consider the implications of an inverted yield curve. In this article, we will look at the economic rationale behind an inverted yield curve as well as what it historically has meant for the macro environment and certain asset classes.