The Bond Market as a Forecasting Tool for Stocks: Four Key Yield Curve Regimes

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Traders often use the shape of the yield curve as a leading indicator of the economy and a forecasting tool for equity performance. Here are four key yield curve regimes to know.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.When analyzing the interplay between bonds and stocks, traders often look at shape of the yield curve to glean insight into the business cycle and predict equity performance, and interest rates - three key variables for the broader economy and therefore for financial assets.

Historically, inversions have frequently foreshadowed impending recessions. In fact, in the post WWII era, every yield curve inversion has been followed by an economic slump.traders will often compare two yields at two specific maturities and refer to their spread, measured in basis points, as “the yield curve”.The 2-year/10-year curve also known as the 2y10y : This is the difference between the 10-year Treasury bond yield and the 2-year Treasury Note yield.

The ‘bull’ and ‘bear’ signifier that describes each regime refers to what happens to bond prices. For example, in bear flattener, when short-term rates rise faster than long-term ones, short-dated Treasuries are being sold, prompting their prices to fall . Keep in mind that bond prices and yields move opposite of each other.

 

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