Investment Grade
Learn more about our investment grade portfolios which are designed to deliver income, stability, and tax efficiency even under stressed market conditions.
Fixed Income
Implications of an inverted yield curve for US bond returns
June 9, 2023
Key takeaways
Yield curve
An inverted yield curve has been in place for five of the past six recessions.
Current inversion
The US Treasury yield curve is at its most inverted since the 1980s.
Fixed income
Fixed income has historically shown positive returns during recessionary periods.
The US Treasury market is the largest and most liquid government bond market in the world. The shape of the Treasury yield curve provides valuable information about how investors view monetary policy, risk and the direction of the economy.
Normally the yield curve is upward sloping with longer maturity bonds offering a yield premium to shorter dated bonds. However, occasionally the yield curve inverts, and short-term rates exceed longer term rates.
An inverted yield curve is viewed as a strong signal the economy may be heading for a recession. A yield curve inversion has preceded every recession since the 1970s — other than the COVID driven event in 2020 — by about a year.
An inverted yield curve has been a historical indicator of recessions
Source: Macrobond. Inverted yield curve represented by the spread between the 10-year US Treasury yield and the 2-year US Treasury yield. Grey bars highlight periods of recession. An investment cannot be made in an index. Past performance is not a guarantee of future results.
During a recession, investors tend to reduce allocation to riskier assets and shift into instruments like bonds. A recession decreases growth and inflation expectations leading to lower interest rates, which further support bond markets. As more investors move into bonds, demand for bonds creates a virtuous cycle of price appreciation and even more demand. This pattern is consistently observed in corporate bond returns for the year following “peak” yield curve inversion during past recessions.
Corporate returns after peak inversion
| 2s/10s Inversion | Peak Inversion | Amount of Inversion at peak | Corporate Index Returns 12-months after peak |
|---|---|---|---|
| Aug 1978 – May 1980 | Mar 20, 1980 | -2.42 | 13.22% |
| Sept 1980 – Nov 1981 | Dec 17, 1980 | -1.71 | 2.95% |
| Jan 1982 – July 1982 | Feb 18, 1982 | -0.72 | 41.31% |
| Dec 1988 – Oct 1989 | Mar 29, 1989 | -0.44 | 11.79% |
| Feb 2000 – Dec 2000 | Apr 7, 2000 | -0.51 | 12.79% |
| Dec 2005 – June 2007 | Nov 27, 2006 | -0.19 | 3.44% |
Source: Macrobond. 2s/10s Inversion is when the yield on the 2-year Treasury exceeds the yield on the 10-year treasury. The corporate index shown is the Bloomberg US Corporate Bond Index. Returns are calculated monthly in the 12-month period following the point of peak inversion. An investment cannot be made in an index. Past performance is not a guarantee of future results.
Related insights
Why investment grade is attractive — and defensive
Turmoil in banking and increased market and economic uncertainty may warrant a greater focus on high quality assets and defensive investment strategies.
April 19, 2023
A golden age for bonds?
Matt Brill joins the Greater Possibilities podcast to discuss why he believes the Federal Reserve can engineer a soft landing for the economy and what investors should consider when positioning their fixed income portfolios in 2023.
February 28, 2023
