Recession “Tipping Point” Triggered: 10Y Yield Crashes Below 1.40%; Countdown To 0% Rates Begins
Last night, when the implied 10Y yield (Japan was closed) dropped to just 1 basis point above 1.40%, we said that we are literally this close from BofA’s “tipping point” for the 10Y Treasury, below which a recession is virtually assured according to the NY Fed’s recession probability indicator, and which also triggers a 12-18 month countdown to 0% rates.
Well, this morning, with risk assets crashing, the yield on the 10Y has sliced below the 1.40% “tipping point” like a hot knife through butter…
… and is now less than 1 basis point away from the all time low of 1.3579% hit on July 8, 2016.
Why does 1.40% matter again?
Because, as we explained yesterday, breaking below this “tipping point” level requires more than 50% probability priced for the Fed cutting rates back to 0%! This means that breaking 1.4% in an on-hold context for the Fed creates a significant inversion of the curve, pushes recession signals higher, and pressures a further inversion of the FF1/FF6 spread which we found in Pricing cuts ahead of the Fed to have no false positives for Fed cuts following a -30bp inversion (currently -16bp).
What this means in practical terms from a duration perspective is that “the market may gap lower on a break below 1.4% for the 10Y Treasury”, as this corresponds to phase transition higher in recession probabilities and a clear challenge to the on-hold Fed stance, “particularly as convexity flows add to what would likely be a broader risk-off move. “
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