The Treasury yield curve provides information regarding the market’s expectations of future economic activity. Recently, the yield curve turned from flat to inverted, which may signal that the market expects a recession to occur over the short to medium term. However, this is not necessarily a surprise for investors, as the U.S. economy has been experiencing “late cycle” dynamics.
While it is worth paying attention to the behavior of economic variables such as the yield curve, they are most informative at extreme readings rather than at temporary inversions for specific points along the curve. Hence, investors should exercise care when trying to make definitive conclusions, or changes to their portfolios, based exclusively on this development.