The inversion of the yield curve revisited its widest point since 1981 on Thursday morning, as the spread between the U.S 10 Year Treasury yield ( US10Y ) and the U.S. 2 Year Treasury yield ( US2Y ) reached a gap of more than 80 basis points.
The separation between the two instruments touched -85 basis points. This came as the 10Y dipped 5 basis points to 3.58% and the 2Y slid 2 basis points to 4.43%.
See below a long-term chart below:
A long period of yield curve inversion is seen as a predictor for recessions. In the past, this was seen in 2006-2007, when the yield curve inverted for an extended period of time and foreshadowed the Great Recession of 2008-2009. Looking further back, a similar scenario played out in 2000 when a yield curve inversion presaged the 2001-2003 market meltdown and economic downturn.
Deutsche Bank noted that not only have the 2s10s inverted, which acts as a recession indicator, but also the 3m10s inverted along with the Fed forward spread. See breakdown below:
As the yield curve inverts, Treasury ETFs and large-scale bond funds come into focus: ( NYSEARCA: AGG ), ( NASDAQ: BND ), ( NASDAQ: TLT ), ( NASDAQ: IEI ), ( IEF ), ( SHY ), ( GOVT ), ( VGSH ), ( VGIT ), ( SCHO ), ( SCHR ), ( SPTL ), ( TLH ), and ( VGLT ).
Wells Fargo strategist Scott Wren commented on the yield curve, "Our strategy has taken on a ‘barbell’ type of an approach where we favor the short and long portions of the yield curve as we believe interest rates are not likely to move meaningfully higher than current levels.”
Wren added: “Our view is that long-term investors have a potential opportunity here to put cash to work in long-term fixed income, where yields are the highest they’ve been in years. Investors with a shorter-term horizon have the potential opportunity to park excess funds in fixed-income instruments with what we consider to be good yields."
Turning to the stock market, stock index futures pointed to a rebound at the open on Thursday with Disney boosting sentiment.
For further details see:
Yield curve inversion returns to multi-decade record