US Treasury spreads point to recession

Yields on long-duration US government bonds are rising, indicating trouble ahead

Rob Isbitts

US Treasury

The 2-10-year US Treasuries spread indicates a recession is imminent in the US.

In June, the “10-2 spread” exceeded -1% for the first time since 1981. That spread has quickly narrowed to 0.14%, as at 20 October.

Eight of the last eight recessions commenced not long after the yield curve reverted to its normal status, with the 10-year rate above the two-year.

With long-term bond ETFs dominating headlines for the wrong reasons – long-term rates surging higher in a manner that has produced massive confidence issues for global markets and breathtaking drops in value of a supposedly “safe” asset class – this latest development should get prime attention for the rest of the year.  

Another closely watched yield curve spread involves the 10-year and the three-month US Treasuries. That hit an all-time low in July, crashing to -1.9%. It has sped back to -0.65% just four months later, a further indication that the bond market may be giving us its version of the two-minute warning.

There are no guarantees in investing, and yield curve reversion may not go nine for nine. But this is where investors need to understand what is happening, the historical significance of it and how quickly things can run amok in markets when risks ultimately get realised.

This is a moment investors cannot let pass by, simply talking about “asset allocation” without focusing on the unique history we are living through in the bond market.

The iShares $ Treasury Bond 20+yr UCITS ETF (IDTL) has become a popular proxy for long-duration US Treasury bonds. After falling a whopping 31.3% in 2022, IDTL is yet to recover and is down 13% this year.

With the shorter end of the 10-2 spread having stalled around the 5% area, the benefits of sitting on the proverbial sidelines with a chunk of client assets might look interesting to many investors.

The bond market is threatening to beat the spread that has forestalled a recession. We will find out soon if the winning (losing?) streak continues.

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