A classmate of mine received a question in an interview recently: "How would your investment strategy change if the yield curve became inverted"

I understand basically what an inverted yield curve means, but I was curious what would likely have been considered the "right" answer to this question.

Thank you.

Typically forecasts recession, so its more likely that the fed will lower rates, which will increase money supply and increase inflation so you can place some bets on treasuries and gold

demand for shorter term securities /credit rises. investors are reluctant to commit money. should also decrease the spread between some lower variance fi securities like treasuries and more volatile bonds so you move money from junkier/corporate bonds to cds, treasuries

Assuming you can get exposure to ABS, bet on securities with ARMs as an underlier. Their rates are typically variable and are going to be updated based on st rates, resulting in an inflow from payments via ARMS and increasing the market value of abs. smart homebuyers may switch to some fixed rate loans to protect themselves from variations in interest rates. Not sure how you can get exposure to that….

Cool! Thanks!