The difference between the 2-year and 10-year Treasury interest rate is referred to as “the spread”. When this number goes negative, the 2-year interest rate is higher than the 10-year interest rate. It always spells trouble.
The markets are reacting to the spread shrinking. See the downward trending line on the right-hand side of the chart below. It’s easy to infer that it will keep shrinking. It’s also easy to infer that you should do something.
First – the current spread of 0.50% or 50 basis points (bps) is consistent with previous economic expansions. Look down at the years in chart where the spread was 50 bps. I created a dotted blue line at 50 bps in the chart to help.
1988, 94-97, 2005, and now. All solid economic times. A lot of time passes between hitting 50 bps and the dark gray bars that note a recession. It’s years, not days.
Second – even an outright negative spread (an “inversion of the yield curve” is the term you’ll hear) leaves a one or two-year window until a recession starts.
The problem is that while it is a reliable forecaster of a future recession, it’s useless as a timing tool.
If you are feeling anxiety and you are not sure about your plan or portfolio, call me.
Keep looking forward,
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