YC2YR Yield Curve 2-10 Spread Weekly Chart; 2's-10's Steepest Since 2018; Inverted H&S Pattern

The 2-10 yield curve, YC2YR, is steepening creating big gains in bank stocks. XLF is up for four months straight and up +2.2% this month with half the month remaining. Of course the regional banks, KRE, outperform since the yield spread benefits them more at handling everyday loans. KRE also rallies strongly for four months and is up +5% this month thus far.

The three-decade bond rally has been epic. A Gary Shilling is the only analyst that called the long bond bull. He was laughed at and ridiculed for a couple decades now everyone realizes he was the only one right. Lemmings and penguins always stupidly doddle after each other (herd-following). So the long multi-decade bond bull market continues into this year although it has been trying to base since 2012. As Keystone previously explained, the bond bull market is over. Yields will move sideways to sideways higher from here forward (in a broad-based way; continue with the discussion below for the short term).

Yields fell apart this summer as investors seek the perceived safety of US Treasuries. The 3-month to 10-year yield spread (yield curve) had already inverted for several months when the 2's-10's above finally fell below zero (brown) with an official inversion. Judging from the past, a recession appears 18 months to 2 years after the inversion. This is why Wall Street remains sanguine about markets. The Einstein's did the math and say there is absolutely no reason to worry since a recession will not occur until the end of 2020 or early 2021 at the earliest. Whew. Glad we cleared that up.

With this knowledge that a recession is nowhere in sight, and knowing that the central bankers plan to print money forever, investors buy the stock market like madmen forecasting that record stock market highs and low rates will continue forever. The financial engineering is fantastic and provides great wealth for Americans, well, at least for those that are already wealthy; now they are super rich. Too bad for the one-half of Americans that do not own one single share of stock; they lose. Oh well, this rigged crony capitalism game will be rectified during the class war in the years ahead.

The 2-10 spread above un-inverts moving higher breaking up and out of the downward sloping blue channel. The 2-10 spread pops, then retreats lower for a back kiss of the blue trend line, and then yield spread bounces from the textbook back test. Now the yield curve is at a critical juncture.

The 2's-10's are about to break up and out of an inverted head and shoulders (H&S) chart pattern (grey lines). 30 bips is the neckline and the head we can call zero down at the inversion boundary, to keep the math simple. Thus, if the 2-10 spread breaks above 30 bips, the inverted H&S pattern will target 60 bips which is also in the vicinity of support and resistance levels from 2017 and 2018.

As YC2YR moves higher, the RSI is trying to sneak out a new high and the MACD line continues to point higher (green lines). These two parameters want a higher high in the yield curve after any pullback occurs. The stochastics are overbot and neggie d. The ROC is drastically negatively diverged. This tells you that the 2-10 spread will pull back for a week or two, but then come back up for more new highs using the RSI and MACD fuel. That is when the yield curve will try to sneak above the 30 bip neckline.

The Aroon green line has nowhere to go but up while the red line is dropping so low that the minute the green line comes off oversold territory it will create a negative cross where yields will continue higher from there forward on a weekly basis. The ADX shows that the long bond bull market (yields moving lower) was a strong trend in late 2017 and 2018 but it petered out when the Q4 2018 waterfall stock market crash occurred. The ADX is down at 16 showing that there is no strong trend in place further hinting that the long term bottom in yields is occurring.

Keystone said for many years, as the inflationists kept saying inflation is around the corner, that the world was in more of a deflation and disinflationary environment and inflation is Godot. Very simply, wages are not rising any significant amount, they have been stagnant for a decade, thus, inflation cannot occur without wage inflation occurring. It's not rocket science. This is why the wage data in the US Monthly Jobs Report is more important than the jobs number or the unemployment rate. Keystone also said there will come a time in the future when all the inflationists finally capitulate and instead say that low inflation, deflation, lack of inflation, whatever you want to call it, is here to stay. We're here. Everybody and his bro now touts low inflation forever so guess what will happen instead going forward?

The YC2YR monthly chart is rocking and rolling to the upside further evidence that the long term bond bull (higher prices lower rates) is likely over. Of course if we have an Armageddon scenario in the stock market over the next year or two, yields may tempt the uber lows again. However, as explained above, the yield curve wants to retreat from this neckline, red trend line, and due to the neggie d and overbot stoch's, in the short term. This should only be a week or so, and the yield curve will increase again (RSI and MACD) and likely try to break up through the 30 bip level in January without much success. The RSI and MACD will likely negatively diverge to join the stoch's and ROC say a couple weeks out and that will create a multi-week pullback in the yield curve (likely in concert with stocks moving lower).The other scenario is that the yield curve retreats and keeps coming down for a few weeks ignoring the slight bit of strength in the RSI and MACD.

Remember, the monthly chart is good for many months of upside in the yield curve ahead, so after the few-week retreat, yields will begin moving higher again. The lower yields typically go hand and hand with a stock market selloff. Folks sell stocks and buy Treasuries (higher prices lower yields) for the perceived safety and defense (which may be misplaced confidence due to the 11 years of obscene central banker intervention in global markets).

At the same time, the low put/call ratios signal a significant top in the US stock market at hand. Thus, the yield curve will likely retreat for a week or so, in concert with stocks dropping, say to end the year, then the yield curve recovers with stocks for a week or so perhaps as January and the new year begins, then big time roll over in the stock market and yields drop and the yield curve above will drop. Since the near-term stock market top has been slow in coming due to the trade war news, seasonality, holidays and so forth, the other scenario is simply a stock market tumbling lower and you will see the yield curve retreating for a few weeks from here without the mini-bounce. In 2020, yields and the yield curve should rise consistently, sideways to sideways higher for the bulk of the year.

Even though the historical data says the recession remains a year or more away, no one is factoring in the sick and obscene central banker money printing. The recession is likely far closer than anyone realizes. Keep in mind that the true start of a recession is not identified until years later when the data is revised several times. Recessions begin when stock markets are at peak highs and the band is playing happy songs. Recessions do not begin after markets selloff; they are typically already in progress. 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.

Note Added 1:34 PM EST: Treasury yields are; 2-year 1.61%, 5-year 1.71%, 10-year 1.90%, 30-year 2.34%. The 2-10 spread, YC2YR, is at 28.666 bips the steepest since 2018 as seen in the chart.