What is Yield curve inversion
An inverted yield curve (when the 10-year treasury yield falls below the two-year yield) is viewed as a warning sign of an impending recession as was the case in the early and late 80s and the noughties. The problem is that it’s kinda lost a lot of its predictive abilities since the Fed has totally manipulated and distorted the entire bond market. When the Fed purchased bonds after the global financial crisis and again during the pandemic (which, btw they’re still doing) it raised bond prices and lowered their yields – the two move inversely. All this bond-buying effectively kept yields fully flat. That was their goal, after all. Hence, the yield curve inversion might not be as powerful as it once was. But that doesn’t mean we’re outa the woods, though!
With taxes and inflation on the rise (I mean just look at energy prices) this is gonna dampen consumer demand, that’s if it hasn’t already. And since consumer demand is ~70% of GDP the less we spend the lower our overall growth. It’s that simple. There’s only so much that consumers are willing to take before they say no and start to tighten their purse strings.
We’re winding down all this stimulus, entering into a period of stagflation (low growth with high inflation) yet we’re still hoping for disinflation to turn out to be true, but it’s probably too late for that. Anyway, rather than agonising over the yield curve the best thing you can do is to make sure your portfolio is resilient and robust. This comes about through being exposed to many different regions and sectors as well as companies of different sizes. This should (hopefully) give you some peace of mind knowing that you’re prepared for it all. Come recession or otherwise.