Long-term yields are moving lower while short-term yields continue to rise. The spread between 10-year and 3-month Treasury yields is the most negative it has been in over a decade. It has been four decades since the spread between 10-year and 2-year yields has been as negative as it is now.
Why It Matters: Yield curves invert (short-term yields become higher than longer-term yields) when the bond market thinks that the Fed has already or will soon become too restrictive for the economy to remain healthy. It is the market betting that the Fed will have to cut rates, bringing down yields at the short-end of the curve. Inverted yield curves are a sign of macro stress and have historically been reliable forecasters of recession. The depth of the current inversions is a warning signal from the bond market, a call for caution on the economy and earnings (and by extension, stock prices). It’s not just happening in the US - except for one blip during 2008, the spread between German 10-year and 2-year bond yields is at its lowest level in three decades.
In this week’s Sentiment Report we take a closer look at how equity investors are feeling following last week’s big rally (the 9th weekly gain of 3% or more for the S&P 500 so far this year).
