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.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.