YC2YR 2-10 Treasury Yield Curve Spread Daily Chart

The chart above shows the 2-10 spread at 249 basis points (the spread between the 10-year yield now at 2.86% and 2-year yield now at 0.37%; 286-37 = 249). Keystone's 2-10 Spread Indicator (see this morning's article) uses the 255 spread number as the happy signal for the banks. As the yield curve steepens, the spread rises, and banks are happy since they can make more money taking advantage of the yield differential. Keystone uses 255+ to signal that happy days are ahead for banks. This chart was posted late November which was indicating the initial top and spankdown, but note the long and strong green lines for the RSI, MACD line and stochastics that wanted another higher high in the yield spread, which occurred a few days ago tagging 265.

Traders are tripping over each other to buy banks and the financial sector believing that banks will lead the stock market to new highs. Perhaps they will be correct, perhaps not. The recent up in yields, the 10-year moving briefly above 3%, whips traders into a long side frenzy (for bank stocks) since they sniff out the steeper yield curve and happy banks ahead so they rush in with both feet.  The move above the 255 level was short-lived since the 10-year yield collpased under 2.90% last Friday on the weak jobs report. The red lines for the indicators are all weak and bleak wanting to see an even lower spread number after any bounce would occur. This would be in concert with the 10-year yield moving lower, or 2-year yield higher, or any combination of the two.

The jury is out on the 2-10 spread indicator. Simply watch the 255 level to see who wins moving forward. The longs running into banks and financials full force right now will be disappointed if the spread remains sub 255. JPM earnings hit tomorrow morning and kick off the bank earnings. Without a 255+ spread, the banks got nothing. It will be interesting to watch moving forward. Projection is a continued flat sideways malaise with notes, bonds, the spread, as well as currencies. In the near-term, the 2-10 spread should continue leaking lower in concert with the 10-year yield leaking lower. 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.