Short-term Treasury rates continued to be pressured, this sent yields to read above 5.0%, levels not seen since 2007
The 2s10s curve inversion extended beyond 100bps on Wednesday session, the spread has not been this wide since the early 1980s
While the indicator can be debated, the 2s10s curve inversion can be interpreted as a leading signal of a U.S. economic recession
We have noted the reaction function of the equity volatility benchmark on previous episodes of curve inversion. The last reading in volatility appears to be too low when compared to a 2s10s inversion beyond 50bps
The chart below shows the VIX Index (green, lagged by 24 months), 2s10s curve (white, inverted, last). Taking into account the lagged reaction of equity volatility expectations every time the credit cycle had seen curve inversions, we could be setting for a spike in volatility over the next 12–18 months
Not to mention that higher front-end yields are tied to less easy monetary conditions and higher costs of capital. This turns out to be unfavorable for corporates and is translated into a negative impulse in borrowing demand. The bottom chart shows a high-yield bond ETF compared to the 2s10s curve, last.
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