Why the 10-2 Treasury Spread Peak Signals Opportunity

Peregrine
May 6
2 min read

Why the 10-2 Treasury Spread’s Journey Signals When to Buy Equities

In macro investing, the 10-year minus 2-year Treasury yield spread — the famous 10-2 spread — has long been seen as a recession warning. But the real value for equity investors comes not just from noticing when it inverts, but from tracking its full cycle back to normalization.

Get this sequence right, and you have one of the best guides for when to get overweight equities.

1. Inversion → Fragility Setting In

When the 10-2 spread inverts (i.e., short-term yields exceed long-term yields), the bond market is signaling rising recession risk.

This phase tells us:

The Fed has likely over-tightened.
Economic cracks are forming.
The equity market becomes fragile — valuations compress, risk appetites shrink, defensive sectors lead.

Historically, this is not a time to load up on equities. It’s the phase when risk needs to be tightly managed, with many rallies likely to fade.

2. Normalization → Markets Start Selling Off

As the spread moves back toward zero and into positive territory (e.g., +50bps), it reflects the early stage of normalization — but not because growth is roaring back.

In most cases, this steepening comes from:

Short-end yields falling as the Fed starts cutting rates.
Long-end yields holding steady or rising.

Ironically, this period often coincides with equities selling off hard, because:

The Fed is cutting into weakness.
Earnings expectations reset lower.
Credit stress lingers.

This is the pre-washout phase — tactical traders can nibble, but long-term investors need to stay patient.

3. Spread Settling at +150–200bps → Risk On Zone

Here’s the key insight:Once the spread settles into a normal slope of +150–200bps, the bulk of the economic damage is usually behind us.

By this point:

The Fed has aggressively eased financial conditions.
Credit spreads have tightened.
Liquidity has improved.
Earnings revisions begin to stabilize.

This is historically the point when equities offer their best risk-adjusted returns — and when smart money goes overweight.

A Look Back: Historical Roadmap

2000–2002: Inverted in 2000, normalized by 2002 → equities bottomed late 2002.
2006–2009: Inverted in 2006, steepened sharply in 2007–08 → only after curve hit ~200bps in 2009 did equities launch their bull run.
2019–2020: Inverted mid-2019, steepened fast post-COVID crash → by the time curve normalized, markets were off to the races.

⚠️ The Nuance: Combine With Other Signals

The 10-2 spread is powerful, but it’s not a standalone signal. To sharpen timing:

Watch credit spreads (corporate bond risk).
Track liquidity conditions (central bank actions, balance sheet growth).
Monitor earnings revisions (sell-side resets).

When these align with the curve stabilizing at +150–200bps, it’s historically been one of the strongest macro buy signals for equities.

Bottom Line

The 10-2 spread doesn’t just warn you about recessions — it guides you through the cycle.

Inversion → equity fragility

Early normalization → market selloff risk

Settling at +150–200bps → max buy zone

For investors, patience through the first two stages and conviction at the third is what separates amateurs from pros.

Disclaimer

This article is for educational purposes only and does not constitute financial advice. Please consult a licensed financial advisor before making any investment decisions.