If you recall, we watched this spread indicator last year as it identifies happy bankers versus sad bankers. Type '2-10 spread indicator' into the search box to perform additional reading on this subject and note the progression of the indicator last year.
Keystone uses a spread of 255 to separate happy bankers from sad bankers. A steep yield curve benefits bankers so happy bankers want to see a spread over 255. Under 255 for the spread indicates sad bankers since the yield curve remains somewhat flatish and does not provide a big advantage for banks.
As of today, the 2-year yield is 0.38% and the 10-year is 2.38%. Thus, the spread is 238-38 = 200 basis points. This is well under what bankers need to rock and roll so any talk about higher yields benefiting the banks is premature at this point. Note that a 2-year at about 0.35% and 10-year at 2.90% would do the trick. That is over 50 bips higher from here for the 10-year, still quite a ways to move.
KS, what does this indicator imply for equities if anything?
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Hello Steve, happy bankers equate to healthy rising strong equities markets. When the spread fell below 255 in 2011 that signaled trouble ahead for equities and the August crash followed along thereafter. So for now, the indicator does not have much of an impact on markets, the inflection point at the 255 spread is important since it changes the tone of markets. Despite the strong market rally since Fall 2011, the equities markets remain in a funk and the spread tells you that the markets remain unhealthy underneath the surface. Of course things can change fast if the 10-year keeps climbing. As Keystone's charts pointed out yesterday, however, yields remain in a sideways channel.
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