{"id":196885,"date":"2023-09-28T11:45:00","date_gmt":"2023-09-28T15:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=196885"},"modified":"2023-09-29T13:19:50","modified_gmt":"2023-09-29T17:19:50","slug":"dis-inversion-and-rhyming-history","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/fixed-income\/dis-inversion-and-rhyming-history\/","title":{"rendered":"Dis-Inversion and Rhyming History"},"content":{"rendered":"\n<p>For those of us who have been riveted by the inverted yield curve, it is fascinating to see the 2-10 inversion fade away over recent days.<\/p>\n\n\n\n<p>To refresh, the 2-10 inversion refers to the difference between 2-year and 10-year US Treasury yields.&nbsp; It is typical for longer-term yields to be higher than those of their shorter-term counterparts.&nbsp; All things being equal, shorter-term bond prices are usually less volatile and more liquid.&nbsp; Those factor into why yield curves tend to be upward sloping, when viewed from left to right.&nbsp; The following graph compares the current US Treasury yield curve versus how it looked five years ago:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-us-treasury-yield-curves-today-green-5-years-ago-yellow\"><strong><em>US Treasury Yield Curves, Today (green), 5-Years Ago (yellow)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"540\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture4-4.png\" alt=\"US Treasury Yield Curves, Today (green), 5-Years Ago (yellow)\" class=\"wp-image-196890 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture4-4.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture4-4-700x404.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture4-4-300x173.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture4-4-768x443.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/540;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>The difference, besides the fact that the current curve is notably higher than its predecessor, is that today\u2019s curve slopes lower before flattening out rather than rising.&nbsp; This is the inversion to which we refer.<\/p>\n\n\n\n<p>As monetary policy changed from aggressively accommodative to restrictive, we saw the relationship between 2- and 10-year yields change dramatically.&nbsp; That will be evident in the chart below, which shows the 2-10 spread for the past 30 years.&nbsp; Since it is commonly believed that 2-10 inversions signal recessions, we have added the beginning and end of recessions, as declared by the National Bureau of Economic Research (NBER), the group that (for better or worse) officially designate (in hindsight) when recessions begin and end:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-30-years-2-10-treasury-yield-spread-blue-white-bars-vs-nber-defined-start-red-and-end-green-of-us-recessions\"><strong><em>30 Years, 2-10 Treasury Yield Spread (blue\/white bars) vs. NBER-defined Start (red) and End (green) of US Recessions<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"509\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture3-7.png\" alt=\"30 Years, 2-10 Treasury Yield Spread (blue\/white bars) vs. NBER-defined Start (red) and End (green) of US Recessions\" class=\"wp-image-196889 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture3-7.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture3-7-700x381.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture3-7-300x163.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture3-7-768x418.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/509;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>You should note that except for a very brief inversion in mid-1998, the recessions were all preceded by inverted yield curves.&nbsp; You should also note that the recessions only began <strong><em>after<\/em><\/strong> the yield curve normalized.&nbsp; That is why we should pay special attention to the fact that the inversion has been rapidly shrinking.&nbsp; The negative economic ramifications might be quite negative.<\/p>\n\n\n\n<p><a href=\"\/campus\/traders-insight\/securities\/stocks\/yikes-or-yolo\/\">In a piece from early August<\/a>, when bond yields began to spike higher, we noted that stocks and bonds can send different messages for an extended period.&nbsp; On that day both yields and stocks rose sharply, and I reflected that when I started in the business in 1987, bonds were mired in a bear market for most of the year while stocks rallied sharply.&nbsp; Until, of course, that reversed quickly.&nbsp; The following graph demonstrates the movements that year:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-january-through-october-1987-10-year-treasury-yields-white-spx-blue\"><strong><em>January Through October 1987, 10-Year Treasury Yields (white), SPX (blue)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"513\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture2-10.png\" alt=\"January Through October 1987, 10-Year Treasury Yields (white), SPX (blue)\" class=\"wp-image-196888 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture2-10.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture2-10-700x384.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture2-10-300x164.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture2-10-768x421.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/513;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>For better or worse, the current year-to-date chart doesn\u2019t look all that different from 1987\u2019s year, so far.&nbsp; (Of course, the actual values are vastly different \u2013 yields much lower and stocks much higher)<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-2023-year-to-date-10-year-treasury-yields-white-spx-blue\"><strong><em>2023 Year-to-Date, 10-Year Treasury Yields (white), SPX (blue)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"513\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture1-28.png\" alt=\"2023 Year-to-Date, 10-Year Treasury Yields (white), SPX (blue)\" class=\"wp-image-196887 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture1-28.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture1-28-700x384.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture1-28-300x164.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/09\/Picture1-28-768x421.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/513;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>I\u2019ve never been a huge fan of simply drawing one graph over another.&nbsp; It can lead to simplistic and specious conclusions.&nbsp; But in this case, we can see that there is indeed a historical precedent for the current trend in bonds versus stocks.&nbsp; It would be irresponsible to suggest that the outcome for this year\u2019s stock market will be analogous to 1987, but it does behoove us to wonder whether the current valuations are sustainable given the dislocations in the bond market.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>For those of us who have been riveted by the inverted yield curve, it is fascinating to see the 2-10 inversion fade away over recent days.<\/p>\n","protected":false},"author":4,"featured_media":182829,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[15,14700,6,8,9,26,3],"tags":[592,3058,560,861],"contributors-categories":[13576],"class_list":{"0":"post-196885","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-fixed-income","8":"category-ibkr-market-insights","9":"category-north-america","10":"category-region","11":"category-securities","12":"category-text-articles","13":"category-traders-insight","14":"tag-fixed-income","15":"tag-inverted-yield-curve","16":"tag-yield","17":"tag-yield-curve","18":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.3) - 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