It means the difference between US10-US02Y spread will move up - arrow on the plot. We can already see that values jumped to 1.63 and that will continue!
While the horizontal line (red/green) indicate 250 days moving average; Every time US10Y-US02Y crossed the 250d average the recession occurred but was not announced until a few months later!
It means interest cuts will follow during Presidential elections in the US and recession will not be announced until 2021!!!
Comment
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Probability of US Recession Predicted by Treasury Spread, Official NY FED website
"Treasury Secretary Yellen says rates may have to rise somewhat to keep economy from overheating" - that will be the last nail to the coffin and will inevitably cause the yield curve to move higher and flip the market.
Great chart but beware of timing. If you look back at the period Oct 98 up to 2000 you will notice the graph crossing the 250 day MA several times and then falling again. Suffice to say we could still have a 1-2 year window of rising stocks before any meaningful inversion and stock market crash.
Simon_says
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@BhaktaBasics, Thank you for the comment, similar question/suggestion was already posted under this plot by @sundevil8 Please check my answer as Yield Curve has to go below'0' zero then move above and close ~250 days moving average, I don't want to go too much into details related to this analysis e.g. interest rate cuts (please check how did they look like in 98-2000s and now 2020s), double deep of Yield Curve or crisis expectation window (statistically 12-18 months). I believe we are approaching huge financial crisis but if you think my timing is wrong then it's fine, official FED website already plotted yellow bar on their timeline, which means they expect something to happen soon fred.stlouisfed.org/series/DGS10
@LotusTrading20, Why are you so frustrated Lotus? Did you lose money in the stock market?
lucamodena
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Can you explain me why the spread between 10y and 1y should increase? It would mean that the price of the long term bond increases substantially while the shorter term bond will increase by a smaller degree or even decrease. This is counter intuitive in a market collapse event. The short term bond price should decrease a lot! Given bankrupcy chances. While the long term should be more stable. Can't figure it out ;/
Tradelive
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@lucamodena, is that because the 1y is already too close to zero? So the 10y has to increase instead, but I still don't know why this delta seems to be so important
lucamodena
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@Tradelive, 1y yield is close to zero, not the price of the bond. You are messing it up ;)
Tradelive
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@lucamodena, aha thanks, I will also look at the bond prices, I was only watching the yield chart
Caripoule
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lets continue with your thought what it means for the stock market.... interest rate cut is, generally speaking, bullish for stocks plus election year almost always comes with a bullish run for the us stocks and companies and most of the time other markets follow.
USD bearish
stocks/ indices bullish
does that make sense?
Simon_says
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@Caripoule, Thank you for this question, I have another plot that shows 250 moving average for US10-US02Y against US indexes and will post it this weekend :-)