{"id":219479,"date":"2025-03-05T12:45:00","date_gmt":"2025-03-05T17:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=219479"},"modified":"2025-03-06T11:52:17","modified_gmt":"2025-03-06T16:52:17","slug":"inversions-and-convergences","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/inversions-and-convergences\/","title":{"rendered":"Inversions and Convergences"},"content":{"rendered":"\n<p>I expected to write today about President Trump\u2019s speech to Congress last night, but frankly, despite its length, there was a dearth of market-moving topics.&nbsp; For better or worse, the market itself is rife with topics worth discussion, with some interesting patterns arising in key investments.<\/p>\n\n\n\n<p>One topic of conversation has been the recent underperformance of banks.&nbsp; While markets as a whole have been performing poorly, financial stocks have done even worse.&nbsp; Compare the relative performances of the S&amp;P 500 (SPX) with KRE (the S&amp;P Regional Banking ETF); XLF, (the Financial Select Sector SPDR); the KBW Bank Index (BKX) over the past week:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-week-chart-kre-red-green-candles-spx-yellow-bkx-blue-xlf-purple\"><strong><em>1-Week Chart, KRE (red\/green candles), SPX (yellow), BKX (blue), XLF (purple)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"595\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture1-2-1100x595.png\" alt=\"1-Week Chart, KRE (red\/green candles), SPX (yellow), BKX (blue), XLF (purple)\" class=\"wp-image-219481 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture1-2-1100x595.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture1-2-700x379.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture1-2-300x162.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture1-2-768x416.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture1-2.png 1105w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/595;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p><br>Over the post-election period, we see that there was early enthusiasm for the banking sector, but that has since faded:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-4-month-chart-kre-red-green-candles-spx-yellow-bkx-blue-xlf-purple\"><strong><em>4-Month Chart, KRE (red\/green candles), SPX (yellow), BKX (blue), XLF (purple)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"598\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture2-5-1100x598.png\" alt=\"4-Month Chart, KRE (red\/green candles), SPX (yellow), BKX (blue), XLF (purple)\" class=\"wp-image-219482 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture2-5-1100x598.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture2-5-700x381.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture2-5-300x163.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture2-5-768x418.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture2-5.png 1103w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/598;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>The reason for the early enthusiasm was quite understandable.&nbsp; Much of the overall stock market rally was based upon hopes for lighter regulation and less scrutiny for mergers and acquisitions.&nbsp; As a heavily regulated industry, the banking sector would undoubtedly benefit.&nbsp; Regional banks initially rose most, since they would be the likely acquirees in an easier M&amp;A climate, though that enthusiasm faded.&nbsp; As of now, we have heard few specifics about bank regulation and merger scrutiny, so it is understandable why some investors got impatient.<\/p>\n\n\n\n<p>But the most recent plunge might have been precipitated by something more specific \u2013 the inverted yield curve is back!&nbsp; Three-month Treasury bills are now yielding more than 10-year notes, though the 2-10 portion of the curve remains normally upward sloping:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-yield-spreads-since-1985-2-10-white-3mo-10-year-blue-with-nber-recession-starts-red-and-ends-green\"><strong><em>Yield Spreads Since 1985, 2-10 (white), 3mo-10-year (blue); with NBER Recession Starts (red) and Ends (green)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"962\" height=\"542\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture3-2.png\" alt=\"Yield Spreads Since 1985, 2-10 (white), 3mo-10-year (blue); with NBER Recession Starts (red) and Ends (green)\" class=\"wp-image-219483 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture3-2.png 962w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture3-2-700x394.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture3-2-300x169.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture3-2-768x433.png 768w\" data-sizes=\"(max-width: 962px) 100vw, 962px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 962px; aspect-ratio: 962\/542;\" \/><\/figure>\n\n\n\n<p><em>Sources: Bloomberg, Interactive Brokers<\/em><\/p>\n\n\n\n<p>Remember, inverted yield curves are bad news for bankers.&nbsp; In general, banks are in the business of borrowing in the short-term, through customer deposits and\/or money markets, and lending long-term via business loans and\/or mortgages.&nbsp; Thus, their relative cost of funding has increased.<\/p>\n\n\n\n<p>And the reason for that increase is unpleasant.&nbsp; We have noted that Fed Funds futures are now pricing in 3 rate cuts for 2025, which is up from the expectations for only 1 cut that prevailed just a few weeks ago.&nbsp; Economic expectations have retreated sharply, exacerbated by yesterday\u2019s tariff implementation.&nbsp; That\u2019s a nasty combination for bankers.&nbsp; Their net cost of funding has remained stable even as the yields on potential loans have declined, while at the same time, weaker economic prospects do nothing positive for their customers\u2019 creditworthiness. &nbsp;No wonder why those stocks suffered.<\/p>\n\n\n\n<p>And speaking of inversions, though in a different context, we should also note that the VIX futures curve has inverted too.&nbsp; It was normal two weeks ago, flipped to a minor inversion last week, and is notably inverted now.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-vix-futures-term-structure-today-yellow-1-week-ago-red-2-weeks-ago-green\"><strong><em>VIX Futures Term Structure, Today (yellow), 1-week ago (red), 2-weeks ago (green)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"450\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture4-2-1100x450.png\" alt=\"VIX Futures Term Structure, Today (yellow), 1-week ago (red), 2-weeks ago (green)\" class=\"wp-image-219484 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture4-2-1100x450.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture4-2-700x286.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture4-2-300x123.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture4-2-768x314.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture4-2.png 1288w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/450;\" \/><\/figure>\n\n\n\n<p><a><em>Source: Interactive Brokers<\/em><\/a><\/p>\n\n\n\n<p>Some of the short-term spike could be related to concerns about Friday\u2019s jobs report, but it is not just nerves that are boosting VIX.&nbsp; Correlations are higher \u2013 as they typically are during rocky markets \u2013 and thus VIX is priced around levels that have prevailed when correlations (as measured by the Cboe\u2019s COR1M index) are at the current value:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-year-chart-vix-red-green-daily-candles-cor1m-blue-line\"><strong><em>1-Year Chart VIX (red\/green daily candles), COR1M (blue line)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"618\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture5-1-1100x618.png\" alt=\"1-Year Chart VIX (red\/green daily candles), COR1M (blue line)\" class=\"wp-image-219485 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture5-1-1100x618.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture5-1-700x393.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture5-1-300x168.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture5-1-768x431.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/03\/Picture5-1.png 1136w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/618;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>Thus, while it might be tempting to note that the VIX curve inversion denotes a disproportionate amount of fear in the short-term, there is a clear relationship to overriding exogenous factors.&nbsp; As I noted y<a href=\"https:\/\/www.cnbc.com\/video\/2025\/03\/04\/nvidia-tesla-palantir-have-shown-the-most-net-buying-of-active-stocks-says-steve-sosnick.html\">esterday during a media appearance<\/a>, the current levels of VIX, while relatively elevated, are pricing in a bit less than 1.5% daily moves.&nbsp; Does that seem unreasonable in this current environment of macro uncertainty?&nbsp; That should be the key influence on your decisions regarding the future path of volatility.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>I expected to write today about President Trump\u2019s speech to Congress last night, but frankly, despite its length, there was a dearth of market-moving topics.\u00a0 For better or worse, the market itself is rife with topics worth discussion, with some interesting patterns arising in key investments.<\/p>\n","protected":false},"author":4,"featured_media":219488,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[17,14700,18,6,8,9,22,26,3],"tags":[3216,18612,4109,317,861],"contributors-categories":[13576],"class_list":{"0":"post-219479","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-futures","8":"category-ibkr-market-insights","9":"category-macro","10":"category-north-america","11":"category-region","12":"category-securities","13":"category-stocks","14":"category-text-articles","15":"category-traders-insight","16":"tag-bank-stocks","17":"tag-market-volatilit","18":"tag-stock-market","19":"tag-vix","20":"tag-yield-curve","21":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site 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