A Brief Fixed Income Rundown
By Celeritas Capital
As I am sure most of you are aware the 10 Year US Bond (10Y) and the 2 Year US Bond (2Y) yield inversion has been a hot topic for a while now. The reason for this is that a negative yield inversion of the 10Y & 2Y has been a forward indicator of an upcoming recession. In fact it has predicted every recession between 1955-2018. However, that being said from the inversion happens and the economy entering a recession it can take 6-24 months. (YCharts)
At the moment of writing the 10Y vs 2Y yield has been inverted since July 6 2022. Meaning this inversion has been going on for around 9 months. We are still around 70-80 basis points away from the historical max drawdown which happened in the late 1970s.
That being said the spread between the 10Y and 2Y is increasing fast. What does this all mean? Well I of course cannot predict the future however based on the past it leads me to believe that this inversion cannot last. In my opinion it is a fool’s errand to try and predict when we will officially enter a “recession” so I’ll avoid that. But I do believe this inversion is important to key an eye on.
The final concerning piece of information regarding the 10Y & 2Y spread is a Goldman Sachs take on the spread. “Stop worrying about the curve inversion, we believe this cycle is different, with an economy that can support a higher long run real rate than currently assumed” says Goldman research. “If the economy stays robust, 'it will be hard to argue that the Fed has been severely restrictive.” I believe this a warning of sorts, it is widely believed that there will be no rate cuts by the FED in 2023. Not to mention the fact most economists agree that the United States is very likely to enter a recession sometime in 2023.
30 Year Treasury Seasonality:
NOTE: Take all of this with a grain of salt, this is NOT investment advice and should not be treated as such. Also thank you for taking your time to read this brief write up, any feedback good, bad or otherwise would be greatly appreciated!
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