The yield curve is used to summarize the interest rates that are associated with US Treasuries of varying duration. Also, the yield curve can be used as a barometer for the strength of the economy, which is our primary focus in today’s.
Traditionally, yields increase as you go out further in time, and we use differences in yields across the curve to convey stress or normalcy in the economy. We use the difference between 2YR yields and 10YR yields for today’s exercise. The difference in these yields is currently trading at its lowest level since 2007 at just 55 basis points (or 0.55%).
Tom goes back in time all the way to 1990 to show when we have seen these yields trade this closely in the past, and he finds that this extreme has been reached usually on the back of 2YR yields increasing while the 10YR yield has remained stagnant. The last two times this has occurred we have seen a significant bear market in equities afterwards.
Check out the segment above for Tom’s thoughts on this recent extreme and information on trading this Treasury spread.