Historic Yield Curve Inversion Reaches 656 Days, Echoing Pre-Stock Market Crash Patterns

Historic Yield Curve Inversion Reaches 656 Days, Echoing Pre-Stock Market Crash Patterns

Based on the latest data, the yield curve of the U.S. Treasury, which charts the yields for two-year and ten-year bonds, has remained inverted for a total of 656 days. This latest inversion joins previous records set in 1929, 1974, and 2008, all of which preceded substantial declines in the stock market. Recently, market observers have been actively discussing this trend, speculating about the future implications for the U.S. economy.

Economic Forecast Clouds as U.S. Treasury Yield Curve Inversion Hits Historic Length

Despite the so-called “official” statistics regarding the U.S. economy, certain indicators are presenting troubling signs for its future. Among these, the inverted 2/10 Treasury yield curve stands out, having remained inverted since July 5, 2022, as per data from ycharts.com. This inversion means the 2/10 yield curve has been flipped for a total of 656 consecutive days. Essentially, an inverted yield curve occurs when short-term government bond rates exceed those of long-term U.S. government bonds.

The current inversion is the fourth record-breaking in history alongside the 2008, 1929, and 1974 inversions.

In essence, U.S. bonds with longer maturities offer higher interest rates to compensate for the increased risk associated with longer investment commitments. However, when this trend reverses, and short-term rates surpass long-term rates, it’s known as an inverted yield curve, signaling investor concerns about the country’s overall economic outlook. On the Reddit forum r/wallstreetbets, participants have been discussing the prolonged inversion of the yield curve noting that it has now extended beyond 500 days.

The inverted 2/10 Treasury yield curve over five years, according to ycharts.com.

“We’ve only seen this 3 times in history: 2008, 1929, 1974. All 3 were [followed by a] 50% stock crash,” the Reddit post says. This specific post ignited a spirited discussion on the platform alongside 3,500 upvotes. “The reversion will be interesting,” one user wrote. “Either the long-term bills rate increases sharply, or the short yields plunge. I wonder which will happen?” Another individual expressed their expectation that such a scenario will unfold.

“I believe what you suggest is very much about to happen,” the person remarked. “China is pulling away from U.S. treasuries. Japan is still fomo’ing into them (actually passed China as #1 U.S. debt holder) – but that’s because the BOJ literally punishes you to buy their treasuries.” The Redditor continued:

The [Fed] has to refinance a sh** ton of bonds in the next 2 years. In fact, I believe in May alone there is about $400 billion in sales – That is an insane amount. The only thing that might save the [Fed] in the short term is the EU is looking like it might cut its rates – If that happens, lots of money will shift out of Europe and gobble up the 5% yield on U.S. paper.

The X account named ‘Wall Street Silver’ also highlighted the more than 500-day record of the yield curve inversion on the social media platform to its 1.2 million X followers. “In 1980 10 years yield peaked at 15%,” one individual commented in response to the X account’s post on Saturday. “It is ‘only’ 4.6% now, lots of room to go up. The problem is the size of our debt.” Another user speculated that the 2024 presidential election might resolve the issue. The person wrote:

The market is waiting for the election result. The big reaction probably would coincide with the seasonal January dip. If Trump wins, there may be a mild correction in January. But if Biden wins, there may be a bear market.

Historically, record yield curve inversions have heralded substantial downturns in the U.S. market, notably preceding the Great Depression. Indeed, the yield curve inverted before both the 1920-1921 recession and the 1929-1932 depression. The first prolonged inversion of 700 days occurred prior to the 1929 stock market crash, with another lengthy inversion preceding the 1974 crash. Additionally, a record-long inversion preceded the 2008 economic crisis in the U.S. triggered by the housing market collapse. With the current inversion having persisted for 656 days, many anticipate a significant downturn looming on the horizon.

What do you think about the record-breaking 2/10 yield curve inversion? Share your thoughts and opinions about this subject in the comments section below.

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