Alternative Thinking

Inversion Anxiety: Yield Curves, Economic Growth, and Asset Prices

3Q19

Topics - Fixed Income Macroeconomics

Read Time - 10 min

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Inversion Anxiety: Yield Curves, Economic Growth, and Asset Prices

The yield curve is considered one of the better indicators to determine where we are in the economic cycle. Historically, a yield curve inversion in the U.S. has often been followed by a recession. If yield curves contain information about future economic growth, they may also predict future stock and bond returns.

We evaluate the ability of the yield curve slope to forecast future economic conditions, as well as returns on stocks and bonds, using over 50 years of data across six countries. While the yield curve slope has reasonably consistent predictive ability for next year’s economic growth, both within and across countries, it has not been a very reliable market timing indicator. Instead, it may be more useful as one signal (among many) for cross-country allocation decisions in stock and bond markets. The current mild U.S. curve inversion is a bearish signal for these markets, but alone we believe it is not a compelling reason to take large bearish positions.

 



About the Portfolio Solutions Group

The Portfolio Solutions Group (PSG) aims to help AQR clients achieve better portfolio outcomes and provide unique insights to the broader investment community.

We thank Paras Bakrania, Jordan Brooks, Antti Ilmanen, Thomas Maloney and Zachary Mees for their work on this paper. We also thank David Kupersmith, Toby Moskowitz, Chris Palazzolo, Scott Richardson, Ashwin Thapar, and Dan Villalon for their helpful comments and Ing-Chea Ang for research assistance.

 

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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

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