Yield curve inversion widens further, hits another two-decade record

Melpomenem

The yield curve between the 2-year and 10-year Treasury notes has continued its inversion course. The spread between the two instruments has now deepened to its most significant level in more than 22 years, dating back to June of 2000.

Early Friday morning, the spread between the U.S. 10-year Treasury yield (US10Y) and the U.S. 2-year Treasury yield (US2Y) touched -55 basis points. In early action trading, the 10Y has come down 7 basis points to 3.88% while the 2Y has slid 4 basis points to 4.41%.

History has shown that elongated periods of inversion often predict future economic downturns.

Dating back to 2000, two specific time periods of inversion stand out. In 2006-2007, the yield curve inverted for an extended time period, which acted as a foreshadowing event to the Great Recession of 2008-2009. Additionally, a similar scenario took place in 2000, foretelling the 2001-2003 market collapse.

See below a chart of the current yield curve:

As the yield curve inverts, Treasury ETFs come into focus: (NYSEARCA:AGG), (NASDAQ:BND), (NASDAQ:TLT), (NASDAQ:IEI), (IEF), (SHY), (GOVT), (VGSH), (VGIT), (SCHO), (SCHR), (SPTL), (TLH), and (VGLT).

Looking at the overall action in Treasuries, Michael Darda, MKM Partners' chief economist and market strategist, said he remains bullish on the asset class.

"Inflation expectations have dropped sharply against the backdrop of a contracting monetary base, a multi-month inversion in key measures of the yield curve, sustained weakness in real broad money, and a crash in residential real estate. It has usually paid to get bullish on Treasuries against this backdrop," he said.

In broader financial news, major market averages opened up on Friday in the green after Russian President Vladimir Putin eased up on Ukraine rhetoric.