Yield Curve Inversion Continues: More Pain Ahead Later?
Updated
This post will provide a quick macro update concerning the yield curve inversion in US bond markets, which have often (though not always) been followed by a bear market in equities.
Note the various yield curve inversions in the 10-2 Treasury yield. This compares the 10Y US Treasury yield with the 2Y US Treasury yield, and when the 2Y yield exceeds the 10Y yield, the curve inverts (the result of 10Y - 2Y is a negative number).
The yield curve has now become inverted for the second time this year. The inversion is deepening, and it's been 10 consecutive days of inversion territory. The inversion is entering its 3rd week of the 10s-2s being inverted.
This is starting to exceed the inversion in 2005-2006 that lead to the 2 year bear market b/w 2007-2008 and it's approach about 1/2 the depth of the inversion in 2000, which was a severe bear that led to the NDC falling 70% over 2 years.
The chart above allows an easy visual comparison between prior inversions (labeled by date) and the current inversion.
The black line on the chart represents the Nasdaq 100
NDX, also tracked by the 
QQQ ETF traded on US securities exchanges.
The current inversion presages a higher likelihood of more pain in equities and other risk assets. An inversion does not necessarily lead to an immediate market decline as history shows, but it tends to lead to recession, which in turn is associated with extended bear markets (rather than a more minor 1-3 month correction as was seen with the Covid crash in 2020).
There was a minor inversion between the 10s-2s Treasuries in March 2022, 3 months ago, but that one only lasted 2 days. The current inversion has lasted now for about 2 weeks and looks likely to continue.
The current inversion has become more deeply negative than even the 2006 inversion, which presaged a severe-2 year bear market associated with the Great Financial Crisis. But so far, it only approaches half the depth of the 2000 inversion, which presaged a different but severe 2-year bear market that saw the Nasdaq lose 70% of its value (albeit with several powerful multi-week / month bear rallies interposed in between major declines).
Note the various yield curve inversions in the 10-2 Treasury yield. This compares the 10Y US Treasury yield with the 2Y US Treasury yield, and when the 2Y yield exceeds the 10Y yield, the curve inverts (the result of 10Y - 2Y is a negative number).
The yield curve has now become inverted for the second time this year. The inversion is deepening, and it's been 10 consecutive days of inversion territory. The inversion is entering its 3rd week of the 10s-2s being inverted.
This is starting to exceed the inversion in 2005-2006 that lead to the 2 year bear market b/w 2007-2008 and it's approach about 1/2 the depth of the inversion in 2000, which was a severe bear that led to the NDC falling 70% over 2 years.
The chart above allows an easy visual comparison between prior inversions (labeled by date) and the current inversion.
The black line on the chart represents the Nasdaq 100
NDX, also tracked by the QQQ ETF traded on US securities exchanges.The current inversion presages a higher likelihood of more pain in equities and other risk assets. An inversion does not necessarily lead to an immediate market decline as history shows, but it tends to lead to recession, which in turn is associated with extended bear markets (rather than a more minor 1-3 month correction as was seen with the Covid crash in 2020).
There was a minor inversion between the 10s-2s Treasuries in March 2022, 3 months ago, but that one only lasted 2 days. The current inversion has lasted now for about 2 weeks and looks likely to continue.
The current inversion has become more deeply negative than even the 2006 inversion, which presaged a severe-2 year bear market associated with the Great Financial Crisis. But so far, it only approaches half the depth of the 2000 inversion, which presaged a different but severe 2-year bear market that saw the Nasdaq lose 70% of its value (albeit with several powerful multi-week / month bear rallies interposed in between major declines).
Note
The yield curve inversion is now entering it's third week. But other portions of the curve that are also important (such as the difference b/w the 10Y and 3 month) have not inverted).
Note
This yield curve is still inverted! Back in July 2022 when this was first posted, the curve had been inverted 2.5 weeks or so. It remains inverted today as many know. But what's most interesting is how long and how deeply it's been inverted. It's the most extreme inversion going back at least to the beginning of available data on this chart. Credit to spy_master for noting that this inversion is the most extreme on record in his recent update this weekend on SPY / SPX. After reading his update, ST went back to the yield spread and checked it out, see below!
SquishTrade
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