The inverted yield curve: what’s familiar, what’s different, and why it matters 

Highlights

• The two primary drivers of the 2-year/10-year yield curve inversion are nothing new: restrictive Federal Reserve (Fed) policy and concerns about its ultimate impact on the economy.
• There are unique factors contributing to the persistence of the yield curve inversion, including slower transmission of Fed policy into the economy, stimulative fiscal policy, and aging demographics creating demand for longer-term fixed income.
• We still expect the Fed to begin slowly lowering the Fed funds rate later this year, most likely in September. Additionally, once inflation data gives the Fed the green light to ease policy, we expect the curve to begin normalizing toward a positive slope.
•  Given our expectation that short-term yields have peaked, it may be prudent for some investors to extend duration and capture today’s elevated yields over a longer horizon.