Bearish flattening: navigating the late-cycle credit warning
25 JUN, 2026
Bond yield curves have begun to experience a bearish flattening in most major markets (with the exception of Japan) — a move that could be interpreted as a vote of confidence in central banks' commitment to anchoring inflation. However, this curve behavior carries its own warning: bearish flattening typically occurs when the economy is in the middle or late stages of the cycle, or when there are overheating risks with inflation running above target.
For corporate bond investors, this is precisely the moment for thorough and disciplined assessment, where rigorous bottom-up asset selection offers its greatest reward. The standard credit cycle dynamic is well known: companies increase their leverage as financial conditions ease and the cost of financing remains low; however, when interest rates rise, the debt burden grows, margins compress, and pressure to cut costs and reduce headcount intensifies. Left unchecked, this late-cycle deterioration can trigger a slowdown and, in the worst case, a recession.
