Recession Incoming or Something Worse? 2/10 Spread Collapses
Recession Incoming or Something Worse? 2/10 Spread Collapses by TOM LUONGO – Gold, Goats and Guns
UPDATE: Now stocks are selling off and the 2/10 spread is less than 10 basis points. Gold, however, refuses to sell off while the euro pulls back versus the dollar.
Mike Shedlock over at Mishtalk noted yesterday that there have been a couple of troubling inversions in the U.S. yield curve recently. They happened in the 2/3 and 3/5 year space.
Mike went on to say that the normal recession indicator, the 2/10 spread, may not invert before the economy turns down.
For further discussion, please see First Inversion in Seven Years: Can a Recession be Far Off?
I repeat my assessment:
- The classic recession signal that most follow is a 2-10 inversion. I doubt we see a 2-10 inversion before recession hits.
- My call: There will not be the warning nearly everyone is waiting for
I don’t mean to rain on Mike’s parade, because I fundamentally agree with him that the Fed is raising rates into a global slow-down but the 2/10 spread is collapsing this morning pretty quickly.
Since Friday it’s gone from 21 basis points to just 13.
|Date||2 year||10 year||2/10 Spread|
Or put another way:
There’s been a lot of talk about the flattening yield curve this year, specifically the 2/10 spread because of its centrality to the lending industry. To put 13 basis points in context that’s by far the lowest of the year. And it looks today like it will continue to flatten.
So, the U.S. Treasury markets are moving quickly to a new state. All talk of a bond rout is over as spreads between U.S. and core European debt widened all year to create an attractive yield play.
But notice how it’s flattened in recent weeks as ‘flight-to-quality’ concerns have gripped markets, most likely over Brexit worries but I think it’s deeper than that. The movement in these markets and gold tell me the worries over France’s protests, Italy’s refusal to bend the knee and growing concerns over Trump’s viability now that the Democrats have control of the House are growing.