My Favorite Chart In The World Right Now

JC Parets
January 7, 2016

The global markets are a never ending puzzle that we're all trying to solve. There is never a straight answer because everything is always changing. At different points throughout the never ending evolution of markets, I have what think at the time to be the most important chart in the world, or at least one of them.

Today I believe that we really need to be watching the spread between the U.S. 10-year Treasury note yield and the U.S. Treasury 2-year yield. With 10s currently at 2.18% and 2s at 0.99%, the spread is now at 1.19. This is has been cut in half, and then some, from last year's highs of 2.61. Us market nerds call this a flattening of the yield curve.

Here is the chart of the 10-Year U.S. Treasury Yield minus the 2-Year U.S. Treasury Yield:

10sminus2s right

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Look at all of this support near 1.20 going back to 2008. It's been tested multiple times. The more times that a level is tested, the higher the likelihood that it breaks. Also look at the 200 day moving average sloping lower. Bad things happen when you're below a downward sloping 200 day. This has crash to zero written all over it when that breaks. This tells me we're looking at an inversion of this yield curve at some point this year.

There are a few ways I can be wrong, of course. If 10s minus 2s hold 1.2 and do not break down, that would be something. I think this would need the short end to really get crushed here, because it doesn't look like the long end is going higher any time soon. I can also be wrong if the curve breaks 1.2 and does not crash all the way to zero. It can reverse somewhere before that. I just think both of these are very low probability outcomes and a break of 1.20 to the downside here means that an inversion of the yield curve is next.

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Tags: $TLT $ZB_F $ZN_F $TBT $TNX $TYX

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