Equity market has further room to rise until yield curve inverts

THE 2s10s spread shows the difference between the 10-year treasury yield and the two-year treasury yield.

The 2s10s spread is a proxy for the yield curve, and much attention is placed on it when the 2s10s spread falls below zero because it provides a good indication of an impending recession. Historically, when the 2s10s spread falls into the negative territory, a recession tends to follow within a few months.

At the same time when the 2s10s spread is below zero, the yield curve would invert. In other words, the short end of the curve is higher than the long end of the curve, usually signalling market panic and expectations of anaemic growth in the future. Alternatively, when the 2s10s spread is negative, liquidity becomes scarce due to the unwillingness of banks to lend.