Two and Ten-Year Yields Invert, Indicating Recession Ahead

Bond market gives biggest recession signal in 12 years.

U.S. yield curves continue to invert, with the yield on 2-year Treasury notes now paying investors more than the yield on 10-year Treasury bonds.

Although the 3 month yield on Treasury securities have inverted against the 10-year note back in May, the correlation between the two-year and ten-year are a bigger indication that a recession is on the horizon, likely starting within the next 12-18 months.

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  • Yield curve inversions are a crucial investment trend to follow, as prior inversions in 1989, 2000, and 2006 indicated trouble ahead with recessions in 1990, 2001, and 2008. The indicator has the best track record of predicting recessions.

    While some investors see the yield spread between 3-month securities and 10-year bonds as the real indicator to watch, the 2-year and 10-year inversion indicates that the 3-month and 10-year may invert within the coming months.

    Many traders and investors also see the move as one of caution in the market on trade war uncertainties, and the resolution of trade issues will create enough market clarity and economic strength to move yield curves back to normal.

    Action to take: We advise caution, with an eye towards a higher portfolio allocation to cash, defensive trades such as gold, and that traders look to take lower profits more quickly on short-term trades like options trades around earnings reports.