While a yield curve inversion is a harbinger of a recession, it is usually followed by a rise in U.S. stocks, according to strategists at Citigroup Inc.
Historically, US equities rose over the year after the spread between two-year and 10-year Treasury bond yields reversed, as happened last week for the first time. since 2019, according to a note from Alexander Saunders and colleagues. Still, feedback is generally muted, they said.
“Investors should expect lower but slightly positive returns from equities if the reversal remains subdued,” the strategists wrote.
The S&P 500 and Nasdaq 100 indexes have climbed for the past three weeks, but have faltered in recent days as bond yields jumped and investors turned to an increasingly hawkish Federal Reserve. The global bond sell-off extends on Wednesday as stocks also tumbled on the prospect of tighter-than-expected monetary conditions.
“U.S. equities ultimately fall in year three, but still outperform international markets,” the strategists said. “Bonds last much longer.”
This article was provided by Bloomberg News.