MacroFactor Research

Yield Curve Inversion as a Regime Classifier for Equity Factor Rotation

Liu, J. · Nakamura, T.

April 2026

Abstract

We propose a hidden Markov model that conditions equity factor exposures on yield curve shape. Under inversion, momentum and quality factors dominate; under normalization, value and low-volatility outperform by 340bps annualized.

Method

A hidden Markov model with yield-curve-shape emissions classifies market regimes, which then condition equity factor exposures in a long-short portfolio.

Results

Under inversion, momentum and quality factors dominate; under normalization, value and low-volatility outperform by 340bps annualized.

BibTeX

@article{quanthq2026yield,
  title={Yield Curve Inversion as a Regime Classifier for Equity Factor Rotation},
  author={Liu, J. and Nakamura, T.},
  year={2026}
}