The Big Yield Curve Shift

 | Apr 10, 2023 20:10

When the yield curve flattens and eventually inverts, you worry. But it’s when a recession hits, the Fed cuts rates and the curve steepens that you become s**t scared.

Yield curve dynamics represent a crucial macro variable, as they inform us on today’s borrowing conditions and on the market future expectations for growth and inflation.

An inverted yield curve often leads towards a recession because it chokes real-economy agents off with tight credit conditions (high front-end yields) which are reflected in weak future growth and inflation expectations (lower long-dated yields).

A steep yield curve instead signals accessible borrowing costs (low front-end yields) feeding into expectations for solid growth and inflation down the road (high long-dated yields).

Rapid changes in the shape of the yield curve at different stages of the cycle are a key macro variable to understand and incorporate in your portfolio allocation process.

Hence, in this piece we will:

  1. Quickly walk you through the different yield curve regimes (i.e. bull steepening, bear flattening etc);

  2. Analyze 50+ years of asset classes returns through these different regimes;

  3. Assess where we stand today, and what the labor market is telling us about the macro cycle;

  4. Conclude with our actionable investment strategy.

  • Bull Flattening = lower front-end yields, flatter curves.