Chart of the Week: The Treasury one-year/10-year spread Chart of the Week: The Treasury one-year/10-year spread Chart of the Week: The Treasury one-year/10-year spread

Chart of the Week: The Treasury one-year/10-year spread

Macro 4 minutes to read
Christopher Dembik

Head of Macroeconomic Research

Summary:  Research from the Fed had repeatedly demonstrated that the one-year/10-year Treasury yield spread is a more accurate predictor of recession than its more widely watched two-year to 10-year equivalent. And a quick look at the former gives cause for concern.


Click here to download this week’s full edition of Macro Chartmania.

According to the Fed's Bullard, one of the reasons for the US central bank to cut rates is the more pronounced yield curve inversion which historically signals that the risk of a recession is increasing. Since last November, part of the US yield curve has been inverting, but not yet the most common indicator watched by investors, the two-year/10-year spread, which currently stands at 0.25%. However, based on most research papers published by the Fed, investors should rather look at the one-year/10-year spread as it has the best track record to predict likelihood of recession.

Recent developments tend to confirm the bears’ worst fears. The one-year/10-year spread briefly inverted in March of this year for the first time since the Great Financial Crisis. Then, the curve steepened before going back into contraction last month as concerns about the global slowdown and the trade war intensify. It is not unusual that the curve rebounds slightly before inverting again. The same happened prior to the last US recession. The first inversion took place in January 2006, then the curve went back into positive territory until June 2006, when the second inversion happened. Seventeen months later, the US officially entered recession. 

Based on the past seven decades, the lag between the inversion of the yield curve and the start of the recession is on average 22 months. In terms of monetary policy, an inverted yield curve has deep implications as it led all of the past six Fed easing cycles of the past three decades and, considering recent market expectations regarding cut rates, it is likely to lead the seventh Fed easing cycle as well. 

While we are talking a lot about the inverted yield curve, this phenomenon gives us little information. It does not tell us exactly how long before the recession starts, its length, and what will be the stock market behaviour during the pre-recession period and during the recession. It only confirms that we are at the very late stage of the business cycle and that investors should be prepared to make their portfolios more defensive.
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.