The 10-2 year Yield spread curve (which gives a good idea of the evolution of the steepening of the yield curve) has been declining inexorably since the beginning of 2011, and it is now close to zero after crossing all the resistance lines.
That is why, FOMC members always put the Fed’s base rate at very high levels to counteract these dysfunctions.
The good speculators anticipated these recessions and invested their capital in 10-year Treasury notes, which capped (or lowered) their yields.
The scissors effect then created an inverted yield curve and recessions occurred one to two years later.
These American recessions then were spreading throughout the rest of the world (and particularly in Europe) as America is considered as the locomotive of the global economy.
However, currently (in fact since 2010), the situation is entirely different, and it is even the opposite: it is the crisis that is currently developing in the euro-zone that will impact the United States.
In that sense, the United States will be a victim of an anticipated recession causes by this 10-2y yield spread which is almost equal to zero…
The yields of the 10-year Treasury notes cannot exceed the 3% limit whereas in such circumstances they should have been in the range of 4 to 5% as in 2006-2007 because the good speculators invest their capital on these Treasury notes.
In addition, FOMC members are forced to raise the Fed’s base rate to counter the risk of a resurgence of inflation since the fundamentals of the US economy are perfect.
The scissors effect lowers the 10-2y Yield spread, and an inverted yield curve will occur later.
This €-crisis was transmitted on the10-2y Yield spread curve in several stages…
Document 1 clearly shows the first drop in the 10-2y Yield spread curve in May 2010 because a Flash Crash occurred in early May, which highlighted the fragility of some countries in the euro area, especially Greece.
However, as the growth potential of the US economy was very high, this Flash Crash has been quickly eliminated, and the 10-2y Yield spread curve returned in its high trend range.
Following that, at the end of July 2011, the exacerbation of the €-crisis was manifested by a rapid drop in the 10-2y Yield spread curve due to the problems of Greece.
The « Euro-zone’s nomenklatura » then put the pressure on keeping Greece in its monetary zone by spending hundreds of billions of euros however the good American speculators have quickly lost confidence in this euro area.
In that sense, the 10-2y Yield spread curve resumed its downtrend interrupted by a rescue of the German 10 year bond (Bund) by the FOMC Democrats during their meeting on April 28, 2015.
Once again, good American speculators quickly lost confidence in the euro area, and 10-2y Yield spread curve resumed its downward trend interrupted, involuntarily, by the election of Trump, which surprised them.
Finally, the good American speculators quickly lost confidence in this distressed euro-zone and, the socialist wing of the FOMC having been ousted, 10-2y Yield spread curve resumed its downward trend until now.
Everything is simple.
10-2y Yield spread is now close to zero (after breaking the symbolic bar of 20 basis points).
The euro area has no more room for manoeuver.
A butterfly’s wings beating could bring the yields down and could reduce the 10y Treasury Notes and 10-2y Yield spread.
When the banks of PIGS will start to fall like dominoes, all the banking system of the euro area will be paralyzed.
Then, it will be the €-crash.