“Off The Wall” Blog
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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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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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