by Texas_Rangers
You have probably heard the connection between the 10y/3m treasury spread and a recession.
An inversion of this curve has preceded our last 9 recessions.
An inversion simply means that you get a higher return from a 3m bond than a 10y bond. So you’re locking up your money for 10 years, but getting less of a return. That means there’s fears about the future.
So, we know that “inversions” precede a recession, and we know we have already inverted but when will the recession begin?
This DD examines the timing of the last two recessions, and applies that data to our current situation.
TL;DR: We inverted in May 2019. If the last two recessions are any indication, the recession will begin sometime between May 2020 and early 2021. Happy trading until then!
EARLY 2000’s RECESSION
• [Jan 2000 market peak]
• July 2000 inversion
• Dec 2000 spread peak (-0.77) [that is, this was the deepest we inverted on the treasury spread]
• June 2001 start to fall off from local highs
• From inversion to beginning of fall-off: 12 mos
• From spread peak to beginning of fall-off: 7 mos
2008 FINANCIAL CRISIS
• Feb 2006 inversion
• Feb 2007 spread peak (-0.60)
• Oct 2007 Market peak
• Nov 2007 start to fall off from local highs
• From inversion to beginning of fall-off: 1 year & 4 months [or 1 year & 9 mos] [I cite two different data points because there’s technically two different points where we can say we inverted prior to the 2008 financial crisis. The first inversion only lasted for one month and was short-lived. The second inversion is probably a better data point, as it was sustained]
• From spread peak to beginning of fall-off: 9 months
CURRENT
• May 2019 inversion [This is when we inverted. So the timer starts to count down from this point]
• Spread peak? [we are at -.35 now, and prior two peaks before recessions were -.77 and -.60]
• We start to fall off from highs about 12 to 21 months after inversion [according to data from prior two recessions]
• Recession to commence sometime between May 2020 and early 2021 [according to the timing of the prior two recessions]
Sources: Here’s 10y/3m historical data. Otherwise I just manually pulled data points from DOW historical charts.