When there is a yield curve inversion banks don’t like to lend money. The inversion is considered a proxy of profit margins available to lenders. And currently the 3-month and 10-year Treasury yields have inverted so banks are lending at modest profit margins.
But according to one analyst, the yield curve inversion isn’t anything to worry about. At least not yet.
“We are not seeing a deterioration of lending standards,” said Alessio de Longis, OppenheimerFunds portfolio manager for the Global Multi-Asset Group, in an interview with Yahoo Finance’s On The Move. “So we are not seeing any evidence of tightening in credit conditions.”
But de Longis said it’s important for investors to monitor credit growth to understand if the flow of credit is deteriorating and whether or not credit spreads are widening. He said there was a pronounced widening of credit spreads in the fourth quarter selloff last year which were unwound in the first quarter.
“It's the way to think about the supply of credit, so on the margin, they [banks] are likely to tighten credit conditions in order to make those lending opportunities more attractive to them,” he said.
Even with the recent yield curve inversion it would take a long period of time before the banking sector would see a trickle down effect, according to De Longis.
“Whether it's an inversion or just a flat yield curve, the reality is that we need that state of the world, that state of monetary policy conditions to persist for a prolonged period of time because ultimately credit decisions are made in a relatively slow fashion,” he said. “It's the persistency of an inversion or a flat yield curve over time that really creates a problem for the economy. At the moment the economy doesn't show any meaningful sign of weakness.”
Yvette Killian is a producer for Yahoo Finance’s On The Move.