An inversion of the yield curve happens when rates on longer bonds fall below those of shorter-term debt, a sign that investors think economic woes could lie ahead.
Investors have been watching the U.S. Treasury yield curve for inversions, a reliable predictor of past economic downturns.“Yield curve inversion, and flatting, has been at the forefront for everyone,” said Pete Duffy, chief investment officer at Penn Capital Management Company, in Philadelphia, by phone. Fears of an economic slowdown have been mounting as the Federal Reserve starts to tighten financial conditions while Russia’s Ukraine invasion threatens to keep key drivers of U.S.
“I will hold out until the 10s to 3-month bills inverts before I turn too negative on the economic outlook,” he said, calling it “the best leading indicator of trouble ahead.” “So it gives you a more immediate picture of if the Federal Reserve has entered a restrictive state in terms of monetary policy and, thus, giving the possibility that economic growth is going to contract, which would be bad for stocks.”
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