Audibling in professional football has become quite a sensation, especially with the addition of on the field “mike-d up” players. These now clearly-discernible audibles have made their way around the internet highlight reels for their hilarious verbiage and cultural references. These clever phrases that constitute an audible signify a change in play-call for the offense, meant to be a reaction to how the defense has lined up.
Many of us are calling audibles in our outlook of the economy and of our portfolios.. One thing to look at as a possible bellwether in these volatile times is the shape of the yield curve. The yield curve is the relationship between the 3-month, 2-year, 5-year, 10-year and 30-year United States Treasury Bill and Bond, plotted on a graph.
My audible in the above title alludes to an important yield curve relationship- the relationship between the two year and the ten year treasury.
This curve relationship is perhaps one of the most important economic indicators. One thing that is happening right now is that relationship between long and short-term rates is growing closer.
The spread between Ten-Two as of 3/22/2018 is at 55bps. It had actually steepened in the last 3 months, which is typically considered good for economic growth. Recently, the spread has tightened which in part explains the volatility since the beginning of February, where the spread was at 78 bps. (FRED website, see below)
One thing we do not want to happen is for the curve to invert, meaning the short-term treasury (2 year or even worse...the 3 month) treasury debt to yield higher than long term treasuries. This is typically seen as a very negative outlook for future economic growth expectations. A recession can follow this type of inversion. Getting close to an inversion, however doesn’t mean the yield will or will not invert!
For more spreads and interactive charts, consider consulting one of my favorite free site, FRED which is the Federal Reserve of St. Louis’s website: https://fred.stlouisfed.org/release?rid=304&t=spread&ob=pv&od=desc