bonds Markets

The 2s10s Is ‘Crazy Inverted’ Again, But This Is The Slope That Matters Most…

"It dominates all other curves we checked in its power to predict".

Remember August 14? It seems like so long ago given everything that’s happened over the past two weeks, but that was the day when the 2s10s inverted. It was, to quote the president, “crazy inverted yield curve!” day. (It was also the day when #TrumpRecession was a trending topic on social media.)

Of course, the vast majority of voters couldn’t tell you the first thing about the yield curve, and while it’s true the 2s10s is a “mainstream” indicator, “mainstream” is a relative term here. It’s “mainstream” as far as yield curves are concerned, which is about like saying someone is “smart” as far as idiots go.

In combination with the Dow’s plunge, the 2s10s inversion was enough to grab the front-page of the business section in every newspaper across the country mid-month, but it still seems unlikely that Trump’s base would have gotten the message had he not tweeted the following on the afternoon of August 14:

Say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back.

Fast forward two weeks and the 2s10s sank to a new post-2007 low at -4bps on Tuesday.

That appeared to weigh on equities. The more “inversion” headlines there are, the louder the recession calls.

Given that this is bound to be back in the news, it’s worth noting that the 2s10s isn’t the best prognosticator of growth outcomes or asset prices.

“This curve doesn’t matter as much”, BofA wrote, in an August 23 note that takes a brief look at what investors should be focused on if they’re interested in the best lead indicator.

“The 3-month rate 1-year forward (1y3m) versus the current 3-month rate dominates all other curves we checked in its power to predict GDP growth, and it does a surprisingly good job”, the bank said, adding that “the flatter the curve, the worse the outlook for growth”.


There’s nothing particularly mysterious going on here. This slope is just a reflection of the outlook for Fed policy, and as BofA goes on to write, “it is very respectable – compared to other indicators – in its ability to forecast stocks and bond yields”.

Of course, if you ask Duke’s Cam Harvey – the “OG” yield curve whisperer – the die was cast back in June, when the 3-month-5-year curve wrapped up a full quarter of inversion.


4 comments on “The 2s10s Is ‘Crazy Inverted’ Again, But This Is The Slope That Matters Most…

  1. So maybe we should be brave and load up on 3m/5y steepeners and ride off into recession? 😛

    Even still, Walt I know you really dislike gold, but maybe you’re viewing it from the wrong angle. Is it a good inflation hedge? Not really. Does it yield anything? No. Does it cost money to hold/store? Yes. But it’s the only hard asset central banks can buy. As the buildup of fiat currencies and debt continues and becomes more and more useless, what can they do? Central banks will be pushing for something tangible. Then you have countries like Russia that are pushing for de-dollarization and stocking up gold like crazy. That’s all gold is – hard asset currencies used by central banks. This is another reason to laugh at the ‘bitcoin is the new gold’ line. Countries are never going to adopt bitcoin as a reserve. Lol could you imagine. I’ve been pushing for people to stock up on gold since it was trading at 1180. It’s been pretty good so far and looks like it could be poised to bubble up, honestly.

  2. Two Fed researchers published a note titled “Don’t Fear The Yield Curve” in which they target exhaustively tested the various spread/yield curve inversions for predictive value vs recession. The 0m-6m forward spread (which they call the near term forward spread) was the most predictive, with the 3m-10y yield curve next and the 2y-10y yield curve lagging. The short term components of the yield curve contributed all of their predictive power. When the note was published (7/2018 and updated 2/2019) the forward spread was not inverted, hence the title. But shortly thereafter it did invert so presumably if that note was being written today the title would be “Fear The Near Term Forward Spread”. I don’t have the URL handy but someone will post it.

    The reason I think this is interesting is that most of the reasons why “its different this time”, and we should disregard the inversion of yield curves, cite the effect of negative foreign yields and QE as distorting and depressing the 10y UST yield. That doesn’t make too much sense to me, but anyway I haven’t read a good argument that those “different this time” factors are distorting the near term forward spread.

  3. charlie corncob holer

    Somehow this old story seems germane, you have the super smart business guru playing with stupid ideas and then going bankrupt. I was always uncomfortable pondering America in the hands of a crook!

    Now, at the time, junk bonds were very common. But Donald Trump appeared before the commission, and he made a very, very stark promise. And he did it in a way that has similarities to some of his statements today. He did it with disdain, and he did it in an unequivocal way. And he said, for example, that he would get loans from regular banks not junk bonds, and he said junk bonds are ridiculous. He said the funny thing with junk bonds is that junk bonds are what make – what made the companies junk. And he said – he just flat out said he would not use them, and that was in February of 1988.

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