Fixed Income Viewpoints: The Yield Curve Conundrum

The Viewpoints series gives investors Lazard’s perspectives on the latest macroeconomic and fixed income news and trends. In this edition, Lazard Asset Management's fixed income team share their assessment on the meaning of the inversion of the U.S. Treasury yield curve.  

Whether a blessing or a curse, fixed income investors are living in interesting times.

One of the most extraordinary developments has been the inversion of the U.S. Treasury yield curve. Short-term yields have been higher than long-term yields, creating a downward slope to the U.S. curve, for an exceptionally long time — exactly a year this July — and the inversion has been the deepest since the inflationary period of the 1970s and 1980s.

What makes it even more unusual: An inverted yield curve has preceded every US recession in the past, but the economy has proven resilient over the past 12 months, even after more than 500 basis points (bps) in interest rate increases from the Federal Reserve.

Is this harbinger of recessions just part of the market landscape now, or is it telling us something more? At their meeting in mid-July, Lazard’s fixed income professionals tackled the curve conundrum and what it may mean for investors in the months ahead.

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