10yr-2yr & 10yr-3mo Yield Curves continue to steepen as shorter-term indicators start to react
A simple post about Yield Curves veers in a lecture of sorts
In NFTRH we have our slow mover indicators toward economic recession and a bust in the boom/bust continuum. These include steepening Yield Curves, market internal rotations toward defensive areas, the ongoing divergence between the T-bill yield and the 2yr yield and more. The ultimate slow movers are the Yield Curves.
First, a look at more time-sensitive indicators like the VIX, which has played out the negative implications of the divergence (to SPX) we’ve been noting for months. Its cause (divergence) can take months, and its effect is immediate. There was a long, upward divergence in VIX while the SPX also rose. The implied pressure finally played out in a solid stock market correction.
But High Yield spreads have yet to get out of the barn, so the implication is not yet dire in the short-term.
When the two items above (a spiking VIX along with market activity beyond what is still only a fairly normal stock market correction at this time) and junk bond spreads start to rampage, when combined with steepening Yield Curves and several other market/economic indicators, the band will be playing in unison and the tune is going to be bearish, as in bear market bearish. As in counter-cyclical bearish. As in “bust” side of the boom/bust continuum bearish.
We are getting there, with allowance for some ferocious market rallies in the interim.
The 10yr-2yr Yield Curve has broken the consolidation and turned back up to steepening, right after I made fun of the mainstream media (they make it so easy, like shooting fish in a barrel, with the Wrong Way Corrigan routine they continually feed the public) for its eyeball harvesting, noise-making uselessness.
The 10yr-3mo Yield Curve was the media’s subject per the linked post. OMG, it ticked inversion again and it’s the Fed favored recession signal! OM effing G! The 10yr-3mo is still in a steepening posture and thinking about following its daddy, above. It has been the laggard to the curve steepener sweepstakes, but give it time. For the manyieth time, it’s not the inversions that bring the bad stuff, it’s the subsequent curve steepeners.
The way I read the divergence between the two yield curves is that the Fed is sitting like a mother hen on its egg (current Fed Funds rate), neither a hawk nor a dove. Just a hen. But the market, per the above, is pressuring them to weaken.
Personally, I don’t think Trump has much clue about what he is doing. Nor do Musk and the DOGE doggie. Sure, they are cutting a bloated entity that needs cutting. But their poorly planned ‘shoot first, ask questions later’ routine is wearing thin on the public and that public includes market participants.
Make no mistake, the macro grind to recession was in play even before Trump was a twinkle in the red hats’ eyes. I didn’t say so. The slow-moving indicators (like Yield Curves) said so. The 10yr-2yr curve steepener was born in summer 2023, and the de-inversion came in September of 2024. The confirming 10yr-3mo de-inversion came in December, 2024. Other negative macro indications have been in play since 2023 as well.
I guess my bottom line is that the mainstream media is not your friend. It wants your heart, your mind and most of all, your eyeballs. It wants your emotions. In some cases, like CNN, it wants you to despise Trump. In others, like Fox, it wants you to blindly get in line and follow dear leader.
But as market managers, it is imperative to think for ourselves. Utterly imperative, especially now that things are finally in motion (I wait years for phases like this, where I can distinguish myself from the lazy herds). The indicators above are just a small piece of the macro puzzle that is presenting itself currently
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