All This Talk Of Inverted Curves …


With regard to Yield Spreads,

we’ve been monitoring the 3mth/10yr spread this week for the possibility of a first indication that a U.S. Recession may be on the cards this year. As a guide, the inversion on the 3mth/10yr has to be maintained for at least 10 trading sessions to be taken seriously as an indication of an oncoming downturn in the economy in about 6 months to a year later.

On 22 May 2019, the 3m/10y spread was only +1bp at 2.38/2.39. The following session on 23 May 2019, it inverted for the second time this year (the 22 March to 28 March 2019 inversion was only 5 sessions) to 2.37/2.31 (-6bps). On Thursday 6 June, the 10-day incubation period was completed with the 3mth/10yr spread yielding an inverted -21bps at 2.33/2.12.

Historically, this has led to some of the most significant recessions in the last 50 years. In fact, in the last 30 year alone, the 3mth/10yr inversion has been the precursor to the Inflationary Recession of 1990, the Crash and the Sub-Prime Mortgage Crisis.

Given the consistency of the cycle, the current inversion is the second clear indication that the U.S. economy is at the end of this 10-year expansion, after the 10-year crossed below the Fed Funds Rate in the second week of May.

Obviously, we at Pattern Trader™ will be looking for yet another sign to give us more clarity on the situation and it is the ultimate inversion – the 2-year / 10-year inversion.

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