US 2s10s

Here's a look at the yield spread between US 2-year notes and 10-year notes. It's sitting at 1 basis point right now and went negative on some screens briefly. It's the first inversion since 2019.

There are many eyes on this chart because it has a long track record of inverting 6-12 months ahead of a recession. Yesterday, I wrote about how the Fed doesn't believe an inversion signals anything and instead watches the spread between 3-month bills and 18-month forward bills.

That said, I think there's some soft  yield-curve  control coming where the Fed will sell off long-dated bonds and re-invest at the front end of the curve in order to speed up the balance sheet runoff. That will put some steepness back in 2s10s.

Overall, I don't think there's any magic indicator of recessions. The 2019 inversion wasn't some voodoo predicting a pandemic. There is certainly a slowdown coming after a blockbuster year of growth but governments won't tolerate a recession in this era; they will instead ramp back up spending.

Here are thoughts from BMO:

What happens once 2s/10s crosses the zero threshold? History shows there is no immediate ramification for an inverted curve and the recession-predicting character of 2s/10s sub-zero has long been unclear.
Given the relevance of oil and gasoline to headline CPI and therefore breakevens, the modest retracement may simply be a respite as opposed to any renewed faith in the Fed’s ability to effectively offset higher headline consumer prices as this moment. The lagged
impact of monetary policy actions notwithstanding, the second quarter will be very telling in terms of the trajectory of year-over-year inflation prints. The April-June base effects remain relevant even as the runup in food and energy prices thus far in 2022 complicate the issue. In the event core prices begin to slowly retrace from the recent spike, the divergence between headline and core prices will be notable; although we don’t anticipate it will derail the Fed’s initial efforts to normalize policy rates. Let us not forget that one of the underlying motivations behind a hurried pace of rate hikes is to ensure the Committee has sufficient flexibly to address another recession – regardless of whether it’s one curve inversion portends.

And from our friend Chris Weston:

Inversion 2s10s… it’s all doom or is it? The average return in the S&P in last 13 inverted 2/10 curve is 3.7% over next 60 days and 12% over next year.

Trading a recession is hard. If  inflation  comes back down, so will the front end.