If the 2yr yield is leading the 3 mo. T-bill yield (it is), the 10-3 mo. yield curve will follow the 10-2 yield curve.
I’ve used this chart repeatedly to show the bear markets that occurred in 2000 and 2007, following 2yr/T-bill yield divergences.
If we make the assumption that the 2yr yield is again leading the T-bill, which itself is a Fed Funds magnet, then we can expect, voila… today’s rate cut (with more to follow). And it’s the “more to follow” aspect that I want to focus on with respect to yield curves. First, per yesterday’s post on the yield curve:
First I’d like to clear something up after a mild debate with a fund manager friend of mine. He questioned why I don’t use the 10yr and T-bill (a tighter Fed Funds proxy) rather than the 10 and the 2yr. My answer is that we are looking for forward direction, and so I want to view the thing (2yr yield) that is leading the T-bill (and thus, the Fed), not the tardy Fed itself. I want to see where the Fed is being compelled to go, not where it has squatted to this point. Look no further than the interminable “transitory inflation” stance the Fed asked us to buy into before they finally got off their dovish ass and began to fight the inflation problem they primarily enabled, if not outright manufactured.
So here is the 10-2 yield curve, un-inverting for the first time since early 2022, when the Fed (inflation is “transitory!” we tell you) – in tardy fashion – finally began fighting inflation. If history is a guide, a recession (grey shaded areas) on a post-inversion yield curve steepener is on its way.
St. Louis Fed (my markups)
Ah, but… why is the 10yr/T-bill yield curve not offering such a dire prognosis? I am glad you asked. The implication of coming rate cuts will confirm what the bond market has already been saying, per the 2yr/T-bill chart at top and the 10-2 yield curve above; that short yields have been too tight and the Fed needs to respond – albeit possibly in tardy fashion once again – to the market’s signals.
St. Louis Fed (my markups)
The very definition of what the Fed is about to embark on (a rate cut regime) is declining short-term yields. Now, if those yields decline harder than 5s, 10s and 30s, which is likely at the dawn of a rate cut cycle, the 10yr-3mo above will play catch-up to its 10-2 brotha from a different mutha (same Dad, the 10yr). When that happens, it will be up to history to decide whether 1992, 2001, 2008 and 2020 were simply flukes or guides to a coming recession.
Given the lags in official recessions from the first de-inversion of the curves, I will stick to our plan of “to or through the election” with patient allowance for a lag during the “though” aspect of the equation. But I have little doubt that economic recession is a clear and present danger at some point in 2025, and quite possibly sooner, rather than later.
For “best of breed” top down analysis of all major markets, subscribe to NFTRH Premium, which includes an in-depth weekly market report, detailed market updates and NFTRH+ dynamic updates and chart/trade setup ideas. Subscribe by Credit Card or PayPal using a link on the right sidebar (if using a mobile device you may need to scroll down) or see all options and more info. Keep up to date with actionable public content at NFTRH.com by using the email form on the right sidebar. Follow via Twitter@NFTRHgt.
********
