New Record for the Bond Market
A highly respected indicator, the spread between the 2 and 10-year Treasury yield, has been inverted for over 600 days and just surpassed the record set back in 1978.
We hit a rather significant milestone last week. A highly respected indicator, the spread between the 2 and 10-year Treasury yield, has been inverted for over 600 days and just surpassed the record set back in 1978.
However, an inverted 2 and 10-year Treasury rate is not a good thing. If the 10-year Treasury yield is higher than the 2-year, it signifies that investors are not concerned about short-term risks and are willing to lend out money for 2 years, with a healthy bonus for lending it out longer. If the 10-year yield is lower than the 2-year, it means that investors are worried about the next two years and think it is safer to invest in the 10-year Treasury, even if it means accepting a lower rate.
A healthy market is the former of the two scenarios.
This indicator is highly respected for predicting recessions (not when, but if). To date, it has never been wrong. But many have said that this time is different. The 2023 and 2024 stock market and economy have been incredibly strong, with calls for an actual soft landing. Some have suggested that because the 10-year started at under 1% and short-term rates near zero, the 10-year can't truly rise as fast as the Fed raised short-term rates, so the only way the curve normalizes is with Fed rate cuts.
The other ironic thing is that there have been 11 recessions over the last 74 years, meaning on average, we are likely to see a recession every seven years. The last recession was in 2020, which means we are 4 years in and could, on average, see another within the next 3 years.
You could also make the case that we experienced a recession in 2022. GDP did contract for 2 consecutive quarters, and the housing and technology sectors went through some pretty severe downturns.
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