In recent months, one of the key themes across the fixed income market, the equity market and beyond is the dreaded “I” word: inversion.
More specifically, investors are watching out for a potential yield curve inversion, or when shorter-dated bond yields cross above their longer-dated counterparts.
Chad Morganlander, portfolio manager at Washington Crossing Advisors, told CNBC’s “Trading Nation” on Tuesday that he’s keeping a close eye on what a potential inversion could mean for the market and how investors should prepare.
Here’s what he said.
• An inverted spread between the 2- and 10-year yields has been a relatively reliable economic recession predictor in recent years, with a lead time of around 12 to 18 months. In other words, an inverted curve has reliably predicated slowdowns in U.S. growth.
• We anticipate this occurring in the next six to nine months as the Federal Reserve remains on a path to interest rate normalization, bumping the 2-year yield higher as the 10-year yield fails to keep the same pace.
• Investors would be prudent to stick with names that experience relatively little volatility, backing away from more speculative assets in portfolios.
Bottom line: As the yield curve keeps flattening, an inversion becomes more likely, and Morganlander is suggesting going with less volatile names in equity portfolios.