MBS Day Ahead: 2 Warnings in Short Term Bond Markets

Posted To: MBS Commentary

The relationship between short and long term yields is an important indicator for bond markets and the broader economy. 10yr yields are almost always higher than 2yr yields, but when they become much closer together, or when 2yr yields actually rise above 10yr yields, conventional wisdom holds that recession is in store. With 10's trading around 1.75 and 2's around 0.8, we're nowhere close to a so-called "inverted yield curve," but the gap has grown relentlessly narrower since the beginning of 2014. Any time the yield curve is narrowing this much, and especially when it's breaking below 1% (as it is now), investors begin wondering how far away the next recession might be. This yield curve flattening is the first warning in the short term bond market, and one that's...(read more)

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