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Morning Notes — Curve Signals

Curve Signals

March 28, 2022

The 5/30 year yield curve inversion has started a Fed policy mistake/recession signaling narrative, particularly since the last 5/30 curve inversion took place in early 2006.  The 2/10-year curve is the segment that generates the most excitement in terms of recession signal quality, and it’s important to note that piece of the curve also inverted in early 2006 and the S&P 500 gained ~25% over the next ~18mos.  The lead time between 2/10 curve inversion and an equity market top is usually 1-2 years with the S&P 500 returning ~15% during that period.  The 2/10 curve is still positively sloped at the moment, but the curve with the best historical correlation to future recessions is actually the 3-month/10-year segment. That piece of the curve also inverted in early 2006, but has spent the past few months steepening with a current spread of +193bps above its 50-year average. We don’t expect a 3month/10year curve inversion, but if it does, you should have ample time (12-24 months) to decide what you’re going to do about it.  

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