Bloomberg News: Equities Are on Borrowed Time as Recession Signal Nears Inversion

Article by Sarah Ponczek in Bloomberg News

Even as U.S. equities rally on the latest trade war developments, strategists at Bank of America Corp. are turning to a trusted recession indicator to figure out just how much time the stock bull run has left.

They’re focusing on the spread between 2- and 10-year Treasury yields, whose inversion has tended to precede recessions in the past. On Tuesday, the 10-year notes traded with a yield less than 2 basis points higher than 2-year notes, the narrowest level since 2007. One closely watched portion of the curve is already deeply inverted, but warning signs are growing as another flip nears.

“The 3-month T-Bill vs the 10-year T-Note curve has already inverted and the risk is that the 2-year and 10-year curve inverts as well,” Bank of America Merrill Lynch strategists including Stephen Suttmeier, wrote in a note to clients. “The equity market is on borrowed time after the yield curve inverts.”

An inversion in the spread between 2- and 10-year Treasury yields has a pretty strong track record predicting recessions and stock market peaks, the issue is more so timing. The signal from the bond market has preceded every one of the last seven recessions, according to Bank of America, and nine out of the last 12.

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