Thought of the Week
An inverted yield curve occurs when yields on short-term Treasuries exceed those offered by long-term Treasuries. Historically, an inversion between the 2-year and 10-year Treasuries has been viewed as a warning sign of an economic downturn, although this time, for now, appears to be different. In fact, June marks the 23rd consecutive month of yield curve inversion without a recession, the longest streak on record.
While some investors may feel like the inverted yield curve is here to stay, it is important to remember that this is not normal. Traditionally, the yield curve slopes upwards, as investors allocating to longer duration, higher volatility bonds demand additional compensation for the increased risk. As shown in this week’s chart, this was the norm in the years before and after the Great Financial Crisis, albeit at different levels of yields. This serves as a reminder that as policy and economic conditions normalize over time, the yield curve will eventually return to its usual upward sloping shape.
At last week’s FOMC meeting, the Federal Reserve reduced the number of expected rate cuts in 2024 from three to just one. While it remained biased toward easing policy, the yield curve will likely stay inverted until it delivers meaningful cuts. Against this backdrop, investors may want to take a barbell approach to their fixed income portfolios. This means taking advantage of yields at the front end of the curve to access attractive income while also maintaining some duration exposure to protect against any unforeseen economic shock.
The week in review
- Headline CPI rose 0.0% m/m and 3.3% y/y
- PPI fell 0.2% m/m and rose 2.2% y/y
- Initial jobless claims rose to 242K, up from 229K
The week ahead
- Retail sales
- Building permits
- Markit PMIs
Chart of the Week: Source: FactSet, Federal Reserve, J.P. Morgan
Asset Management.
Thought of the week: Source: FactSet, Federal Reserve, J.P. Morgan
Asset Management.
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Originally Posted June 17, 2024 – Weekly Market Recap
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