Citi Strategists Say Curve Inversion Tends to Signal Stock Gains

(Bloomberg) -- While a yield curve inversion is a warning sign of recession, it's usually followed by a rise in U.S. stocks, according to Citigroup Inc. strategists.

Historically, U.S. equities have climbed in the year after the gap between the two-year and 10-year Treasury bond yields inverts, as happened last week for the first time since 2019, according to a note from Alexander Saunders and his colleagues. Still, returns are typically muted, they said.

“Investors should expect subpar but slightly positive returns from equities if inversion stays mild,” the strategists wrote.

The S&P 500 and Nasdaq 100 indexes have climbed over the last three weeks, but wavered in recent days as bond yields surged and investors switched focus to an increasingly hawkish Federal Reserve. The global bond selloff is extending on Wednesday while equities also slumped over prospects of monetary conditions which are tighter than expected.

“Eventually U.S. equities turn down in year three, but still outperform international markets,” the strategists said. “Bonds do well for longer.”

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