Why Slightly Inverted Yield Curve Doesn't Worry Us

The US's yield curve inverted again this week, reigniting fears of a looming recession. Our view, discussed at length in March and early April, remains unchanged: Such a shallow inversion (12 basis points between the 3-month and 10-year US Treasury yields, as of market close on Thursday) is largely indistinguishable from a flat or slightly positive curve, and overall, the global yield curve matters most. We live in a world where big banks can borrow in one country, hedge for currency risk if they like, and lend in another—seizing arbitrage opportunities from different countries' different interest rates. Today's global yield curve is positively sloped, helped both by negative short-term rates across Europe and Japan as well as relatively high US long rates. So we see plenty of potential for positive surprise, rendering yield curve dread—which sets expectations low and bakes fear into the marketplace—a rather bullish helper for stocks.