Email of the day (2)
Comment of the Day

April 27 2010

Commentary by Eoin Treacy

Email of the day (2)

more on monetary indicators and bear markets
"I am looking forward to your Chart Seminar next month.

"In the mean time I would be grateful if you could tell me where I can find a chart or charts which show the yield curve. The email of the day on the subject was very interesting and I would very much like to see for myself in the chart library. Is there any way in which you could provide links so that items mentioned in your daily review can be examined in graphic form."

Eoin Treacy's view Thank you for this email which I'm sure will be of interest to other subscribers and I am looking forward to meeting you at next month's Chart Seminar in London.

A yield curve is a chart made up of the various different yields available across the breadth of maturities for any sovereign. In the Chart Library, we use the spread between the 10yr and the 2yr to illustrate the historic relationship between these two points on the curve. Predefined charts for various 10yr-2yr spreads can be found in the Spreads and Overlays section of the Chart Library. (Also see Comment of the Day on March 4th for examples of all those currently available.) You can also create comparative charts such as those in the examples immediately below using the Charting Tool. Here are some instructions on how to do this.

Once you have found the spread you are interested in, click on the Charting tab in the charcoal bar above the chart. A popup window will appear. Click on the Analysis dropdown menu and select Comparison. An additional dropdown menu will appear where you can select the S&P500, which is the first item on the list. Next hit the Apply button.

I have copied some sections from yesterday's email below and inserted what I believe are the relevant charts:

1) 1/1981-7/1982 with a fall of 27% on the S&P500
2) 4/2000-10/2002 with a fall of 49%
3) 10/2007-4/2009 with a fall of 56%


1. Rising US Treasury yields 10/1980-7/1982 together with rising interest rates and inverted yield curve heralded a bear market from 1/1981-4/1982
2. Rising yields 7/1999-7/2000 in parallel with rising interest rates and inverted yield curve 4/2000-10/2000) and also a high oil price heralded the bear market 2000-2003
3. Rising yields 7/2006-10/2006 also in parallel with these other indicators was again a warning of the bear market that began 10/2007
"However, Treasury yields alone were not sufficient to signal a bear market ahead:
4. Rising yields 7/1983-7/1984 and also rising interest rates 4/1984-7/1984 occurred at same time as a market correction 1/1984-7/1984 but there was not a bear market. The yield curve stayed above zero.
5. Rising yields 1/1994-1/1995 together with rising oil price 7/1994-10/1994 and rising interest rising rates 7/1994-10/1995 did not initiate a bear market. The yield curve was positive.

To focus on the desired timeframes, I pulled up as much data as the Chart Library has and then zoomed in to the parts I was interested in. To zoom, hold down the left mouse button and drag the shaded area to the left or right, highlighting the area you wish to enlarge. As soon as you release the mouse button, it will zoom in.

An inverted US yield curve is a useful lead indicator of recession but it is also worth noting that it provides a relatively long lead, often in excess of a year. This suggests that once the yield curve becomes inverted it is time to begin thinking seriously about an exit strategy rather than selling everything at once.

Back to top