Thursday, August 25, 2016

YC2YR 2-10 Treasury Yield Curve Spread Weekly Chart Flattening Yield Curves May Subside

The yield curve continues to flatten across Treasuries the chart shows the 2-10 spread at 80 bips (1.55% for 10-year yield minus 0.75% for 2-year yield equals 80 basis points). At this writing the 2-year yield is up one bip to 0.76% so the 2-10 spread flattens further to 79 bips. The yield curve has not been this flat since late 2007 (pink line). The spread came down and filled that gap from back then.

The spread between the 5-year and 30-year yields are at multi-year flatness as well. Ditto the 2-year to 30-year spread. Global yield curves are flattening. Note the flatness in the spread in 2006-2008 which led into the recession and market crash. The green lines show the rising wedge, oversold conditions and positive divergence that want to see a bounce higher in the yield spread reflecting a steepening yield curve. Banks love a steeper yield curve.

The rise in the 2-10 spread can manifest itself in a few ways. First, the 2-year spread could remain anchored while the long duration Treasuries sell off (lower prices higher yields). Second, the long duration yields can remain anchored and the 2-year yield drops. If Yellen flaps her dovish wings, the 2-year yield will drop. If she is hawkish, the 2-year yield will rise. Note the dilemma facing Yellen. If she is hawkish touting a strong economy, the 2-year yield will rise creating a flatter yield curve, hurting the banks, and stifling any economic recovery that she believe's is coming. The Federal Reserve and other central bankers are getting tangled up and caught in their sick Keynesian webs.

Another way that the spread can rise, as the chart above predicts on the weekly basis, is all yields moving higher with the long end yields, 10's and 30's, moving up at a slightly quicker pace than the short end (long end notes and bonds selling off creating higher yields). This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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