A fairly unusual situation has occurred in the U.S. Treasury bond market. Bonds with shorter maturities have higher yields than those with longer maturities (over 5 years). Normally, higher yields offset the additional risk an investor assumes by investing in bonds with longer maturities. The recent so-called “inversion” in the U.S. Treasury yield curve may be implying that an economic downturn lies ahead. However, given the limited number of times that the yield curve has inverted, 4 since 1976, it is difficult to infer much of anything from the data. Some strategists argue that the inversion indicator is fool proof evidence of impending recession and a decline in the stock market, while others shrug and point out that “an inverted yield curve as predicted nine out of the last four recessions”.
The following article by Dimensional Fund Advisors was originally published in late 2018 during a period of extreme market volatility. We think the concepts are relevant today and we hope you agree.
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