Inverted Yield Curves and Expected Stock Returns

Author: Eugene F. Fama and Kenneth R. French

Yield curves typically slope up, with long maturity government bonds promising higher returns than short maturity bonds. Much empirical evidence says the slope of the yield curve predicts economic activity (e.g., Harvey 1988, Estrella and Hardouvelis 1989, Fama and French 1989, Estrella and Mishkin 1996). Inverted yield curves, with higher yields on short-term government bonds, tend to forecast future recessions. Perhaps because of this relation, some investors, fearing that an inverted yield curve predicts low stock returns, reduce their equity exposure when the term spread is negative. We test whether the fear is justified. The answer is no. We find no evidence that inverted yield curves predict stocks will underperform Treasury bills for forecast periods of one, two, three, and five years.

Fama, E. and French, K. 2019 'Inverted Yield Curves and Expected Stock Returns'

How can tebi help you?