What Do Inverted Yield Curves Mean for Your Portfolio?

Considered by some as a leading indicator of a recession, the yield curve has been inverted since July 2022, the longest period on record. This happens when longer-term bonds have a lower yield than shorter-term bonds. Under normal conditions, investors should expect the opposite because investing in longer-term securities means you are tying up your money for a longer period. Practically, an inverted yield curve means that the market expects interest rates to fall. Since the Federal Reserve will typically cut its target rate during an economic downturn, an inverted yield curve often precedes a recession, but it is not a perfect predictor. Although investors may want to consider some small changes to their bond portfolio when the yield curve is inverted, it is not a reliable indicator for trying to time the stock market before a potential downturn.

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