The 10 year versus two year spread on the United States government yield curve offers some insight into major economic and financial marketplace trends. US Treasury 10 year note spread relationships versus other instruments of similar maturity further confirm or signal major marketplace trends. The US of course is not the only nation with a yield curve, and America’s debt playground is not the only relevant one. America is not the only country with painful fiscal troubles. However, both the UST 10/2 yield curve differential and important 10 year UST note intermarket spreads underline recent trends in stock benchmarks such as the S+P 500 (and in commodities “in general”). They also warn of US (and worldwide) economic weakness ahead.
Across various parts of the yield curve, traders and other observers compare instruments of similar maturity. A popular time benchmark is 10 years. Given the variety of nations and marketplace sectors, potential quality comparisons are numerous. A survey of a handful underlines the ability of such spreads to shed light on economic conditions and various marketplace trends.
However, history is not destiny in spreads, including this German/US sovereign spread. Admittedly Treasuries offer some an apparent safe haven against the crumbling of parts of the international banking (financial) system. Yet with the US ten year yielding about two percent and current US inflation levels around that, and with the Fed determined to create inflation of around two percent, how eager will Chinese, Japanese, and other holders of US government debt be to keep being net buyers of it? We all know that shorter term UST yields are even less. What if foreigners become net sellers of Treasuries? Or, suppose the US dollar weakens sharply from current levels. What if this is not only on a broad real trade-weighted basis, but also against the Euro FX as well? What if America engages in another substantial round of money printing (or some other clever easing), and that the European Central Bank does not follow suit?
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