A flattening US yield curve is often an economic red flag.
In the past, when the gap between the 2- and 10-year yields has fallen below zero—or inverted—a recession has followed in a year or two. In those environments, you want to own defensive assets like Treasuries.
A more likely explanation for today’s low long-term yields is the massive liquidity global central banks have pumped into the financial system. That’s distorted many market signals.
Today’s curve still has a ways to go before inversion. Plus, the global economy looks pretty strong, so we don’t think a recession is in the near-term cards. In which case, you want to favor credit assets.
Even so, a flatter yield curve can’t be dismissed outright, because these aren’t normal times.
So, our advice is to strike a balance in your bond portfolio between rates and credit.
