Who Said the Yield Curve is Inverted?

Could the current yield curve follow the same pattern as crude did?

An inverted yield curve is said to be indicative of a recession.  Why?  Because the last 7 recessions were all preceded by an inverted yield curve.  The yield curve we are referencing is the difference between the 10-year yield and the 2-year yield.  Indeed, toward the end of August this yield curve did go briefly into negative territory for a few days. Does that mean a recession is ahead?  Only time will tell.  However, looking at today, we put in a bullish engulfing candle on a daily timeframe (in positive territory). 

Source: Tradingview, City Index

The main reason for the bid was that the back end (longer term) bonds sold off at a faster rate than the front end (shorter term) bonds. 

Source: Tradingview, City Index

Bonds and yields are inversely related.  Therefore, yields rose faster in the back end than in the front end causing the yield curve to rise.

Will the yield curve turn negative again soon?   Obviously, there is no way to tell, but let’s look at another instrument with a similar pattern and see what happened:

Source: Tradingview, City Index

Fall of 2018, WTI Crude Oil

  • Traded lower in a channel from near $77.50 to near $55.00
  • Put in a head and shoulders REVERSAL bottom down to $42.23
  • Stalled at the neckline of the 32.8% retracement of the entire move lower, near $55.00
  • Broke the neckline at roughly $55.00.
  • Traded higher within a channel to the 61.8% retracement of the previous move, and horizontal resistance, near $64.00.

Source: Tradingview, City Index

Summer of 2019, Yield Curve

  • Traded lower in a channel from near 0.25 down to 0.00
  • Currently putting in the right shoulder of a possible head and shoulders REVERSAL bottom down near -0.05.
  • Stalling at neckline at 0.041%
  • Bidding up towards the 38.2% retracement level of the entire move lower, near 0.086.
  • If the 38.2% retracement level gets taken out, the yield curve could bid up to the 61.8% retracement of the previous move, and horizontal resistance, near 0.15/0.17

Could the current yield curve follow the same pattern as crude did in the fall of 2018?  Maybe. But planning a trade and being ready for the possible outcomes are just as important as executing the trade!


Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.