US 10-year yields are currently trading at 2.8%, while shorter-term 2-year yields have surged higher, more than doubling over the last 12 months to 2.6%. The difference between 2 and 10 year yields has reached a scant 20 basis points. The US yield curve is flat as a pancake. Typically, investors demand a higher rate of interest when locking up funds longer term, unless of course they are concerned about the future. Then demand for long-term debt drives bond prices higher and yields lower. When long-term bond yields drop below short-term bond yields, the yield curve inverts. It is a sign that all is not well in the financial system and we are almost at that point today. Once the yield curve inverts, and then normalizes, it signals recessionary times ahead and pain for equity investors.
The conundrum today is that US stock markets are hitting all-time highs in many cases. Which market is correctly predicting the future, stocks or bonds? We are about to find out.
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