2's 10's INVERSION - THE TRUTH
๐ฒ 2's 10's INVERSION๐ฒ
A journalist's favourite recession indicator, the โ2โs 10โs curveโ inverted earlier this monthโฆ As the story goes, ๐ฉ๐๐๐จ ๐ก๐๐๐๐จ ๐ฉ๐ค ๐ ๐ง๐๐๐๐จ๐จ๐๐ค๐ฃ within 12-24months ๐ฒ
๐ But this timeโฆ itโs different ๐
Hereโs the chart -> (FRED-FRED:T10Y2Y)
To clarify, Iโm not saying there wonโt be a recession, or NSDQ100 crash, in fact itโs a real possibility. But the 2โs 10โs chart is not a good indicator to rely on.
WHAT IS THE YEILD CURVE โคด
The yield curve is just a curve plotted on a graph of the interest paid on debt.
The X-axis being the duration of the debt (e.g. a 2yr loan and 3yr loan etc.) and the Y-axis being the interest (e.g. 1%, 2%, 3% etc.).
2๏ธโฃ - 2โs is shorthand for the 2 year US Treasury Note (a 2 year loan to the US gov.)
๐ - 10โs is shorthand for the 10 year US Treasury Note.
๐ค HOW STRANGE
Itโs an odd phenomenon that a shorter term loan could pay higher interest than a longer term loan - because why would someone want to lend money for a longer time at a lower interest rate ๐คท
But this - otherwise accurate signal for a recession - is no longer credible as a market indicator.
Currently the yield curve is (heavily) distorted, with central banks around the world purchasing their own bonds (treasury notes). On top of that the FED has clearly stated they expect the funding rate to get to about 3% in 2023 - but expects a long term rate of 2.5%. So the FED is indicating intentional inversion.
Itโs possible the yield curve could continue flattening or inverting, further fuelling these โrecession imminentโ articles. It's good to remember a small inversion is not a concern in this case.
There are clear signals of what will trigger a recession, I'll cover those in a future post. (remember to add me to a Watchlist to be notified)
HOW COULD YOU TRADE THIS
You could short the SHY and go long IEF or TLT to take advantage of the curve normalising over time.
In fact, from here, the IEF looks good even without the $SHY short position (saving fees and keeping capital free)
A journalist's favourite recession indicator, the โ2โs 10โs curveโ inverted earlier this monthโฆ As the story goes, ๐ฉ๐๐๐จ ๐ก๐๐๐๐จ ๐ฉ๐ค ๐ ๐ง๐๐๐๐จ๐จ๐๐ค๐ฃ within 12-24months ๐ฒ
๐ But this timeโฆ itโs different ๐
Hereโs the chart -> (FRED-FRED:T10Y2Y)
To clarify, Iโm not saying there wonโt be a recession, or NSDQ100 crash, in fact itโs a real possibility. But the 2โs 10โs chart is not a good indicator to rely on.
WHAT IS THE YEILD CURVE โคด
The yield curve is just a curve plotted on a graph of the interest paid on debt.
The X-axis being the duration of the debt (e.g. a 2yr loan and 3yr loan etc.) and the Y-axis being the interest (e.g. 1%, 2%, 3% etc.).
2๏ธโฃ - 2โs is shorthand for the 2 year US Treasury Note (a 2 year loan to the US gov.)
๐ - 10โs is shorthand for the 10 year US Treasury Note.
๐ค HOW STRANGE
Itโs an odd phenomenon that a shorter term loan could pay higher interest than a longer term loan - because why would someone want to lend money for a longer time at a lower interest rate ๐คท
But this - otherwise accurate signal for a recession - is no longer credible as a market indicator.
Currently the yield curve is (heavily) distorted, with central banks around the world purchasing their own bonds (treasury notes). On top of that the FED has clearly stated they expect the funding rate to get to about 3% in 2023 - but expects a long term rate of 2.5%. So the FED is indicating intentional inversion.
Itโs possible the yield curve could continue flattening or inverting, further fuelling these โrecession imminentโ articles. It's good to remember a small inversion is not a concern in this case.
There are clear signals of what will trigger a recession, I'll cover those in a future post. (remember to add me to a Watchlist to be notified)
HOW COULD YOU TRADE THIS
You could short the SHY and go long IEF or TLT to take advantage of the curve normalising over time.
In fact, from here, the IEF looks good even without the $SHY short position (saving fees and keeping capital free)