What to Expect when 2Y/10Y US Treasury Yields Invert

by John Galt August 14, 2019 06:00 ET

Doom. Death. Locusts. Fire from the sky. Global warming. Global cooling. CNBC anchors crying. Fox Business hosts blaming Democrats. Bloomberg hosts blaming the US 2nd Amendment.

Is that the kind of pure hot holy hell we can expect when the 2 year US Treasury and 10 year US Treasury rates invert soon (possibly today)?

Chart from CNBC.com

Actually no. But the algorithms which power 80+% of all Wall Street activity will notice the uptick in mentions of the words “inversion” and “recession” and begin to sell stocks.

The markets may sell off hard immediately or may not. The oversold short covering bounce we saw this week was hardly encouraging and Trump’s “oh crap my poll numbers are sucking” (aka, the DJIA) meant that he had to offer some sort of temporary reprieve in the trade war with China or risk an immediate market crash.

The longer the yields and steeper the inversion however could meant the sell off, triggered by almost anything, will be intense. The markets have not had an 8 billion share convulsion in ages and with Christmas Eve 2018 still fresh in traders minds, the fear of Mom and Pop Main Street adding to the selling pressure could easily create a nightmare scenario. Especially since many younger traders have never witnessed a full one to three month capitulation move.

The US Treasury markets nor precious metals really believed that the rally on Wall Street yesterday was real so the smart money continued to hedge. With the now visible and potential impact of a 2’s/10’s inversion facing the markets, short of Trump getting on one knee and offering to marry Xi, nothing will stop this market sell off from re-accelerating in the next 30 days.

The UK Gilts have just inverted this morning so buckle up folks. The proverbial “risk off” could turn into a “panic on” and move markets dramatically in the weeks ahead.

UPDATE 06:08 ET:

Never mind, we have just inverted in a dramatic fashion with a rapid move this morning:

With this happening for the first time since 2007, I would expect a lot of drama in the financial news today as US Equity futures took a dump down to almost -200 points at the same time. So much for the Trump-China iRally yesterday.

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