Tracking the inversion of the yield curve US02Y - US10Y

5 May

The inversion of the yield curve often serves as a reliable indicator, suggesting an impending increase in the likelihood of both recession and market downturns in the foreseeable future

To track this inversion effectively, you can subtracting the interest rates of the 2-year US government bonds from those of the 10-year bonds US02Y - US10Y

When this calculation yields a result above 0 percent, it indicates an inversion in the 2-year versus 10-year interest rates

In 2022, when the current inversion of the yield curve began, the “experts” were constantly warning us of an immediate recession and market crash

However, historical data reveals that significant market corrections typically materialize many months, if not years, following the yield curve inversion

The upper chart depicting US02Y-US10Y, the black 0 line serves as a reference point. Meanwhile, the lower chart illustrates the drawdown of the S&P 500 SPX in the last 35 years

The picture shows that each time there was a drawdown of at least 15% after the end of the inversion of the yield curve

The dashed blue lines represent the end of the inversion, indicating that a larger drawdown is more likely after the end of the yield curve inversion and not during the inversion

I'll be diligently monitoring the current inversion once again. A breach below 0% would warrant a considerably more cautious approach to the markets

Admittedly, such correlations aren't infallible, and their fruition can sometimes span several years

Nevertheless, they hold merit from a cyclical perspective

Should the inversion of the yield curve cease to be inverted around 2025, a recession and market correction following the 18.6-year real estate cycle would become increasingly likely

This would also align with the anticipated correction in the crypto market, typically occurring within a 4-year cycle