The S&P 500 ( SPX ) is vulnerable to a bigger correction as the U.S. 2-year versus 10-year (2s-10s) yield curve steepens, Bank of America strategists said in a note on Tuesday.
Historically, yield curve divergence cycles, which have an average duration of 25 months, often accompany recessions and bring increased market volatility.
“Recessions have accompanied 10 of the last 12 steepening cycles,” the BofA team notes.
The SPX’s performance during these periods has been mixed, with the index rising 58% of the time, yielding an average annual return of 5.7%. However, BofA points out that the SPX’s largest corrections during these cycles have averaged a significant 26.5%.
For comparison, the largest correction seen since the start of the current bull run in June 2023 was a 10.3% drop from late July to late October 2023. The mean and median of the largest corrections during of these periods were 26.5% and 20.3%, respectively.
BofA warns that a recession could trigger a deeper correction, with historical declines as high as 56.8%.
“The SPX is vulnerable to larger corrections when the yield curve steepens,” BofA notes. The current 2s-10s cycle began in June 2023, when the curve bottomed out at -1.06, and by the end of September 2024, the SPX had risen 29.5%. However, given the historical context, the market may not remain immune to larger corrections moving forward.
The yield on the 10-year U.S. Treasury note rose above 4% on Monday for the first time in more than two months, while a key part of the yield curve briefly inverted. The jump came as markets scaled back expectations for another big rate cut after Friday’s strong US jobs report.
Investors were also preparing for auctions of $119 billion in three-, 10- and 30-year notes, leading to some selling of government bonds, which pushed prices down and yields up.
The yield on 2-year U.S. Treasuries, which is more sensitive to expectations of monetary policy, hit its highest level since Aug. 19, rising 7.4 basis points to 4.006 percent. On Friday, it jumped nearly 22 basis points, marking its biggest daily gain since April.
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Reference;
Karaahmetovic, V. (2024) SPX vulnerable to corrections when yield curve steepens: BofA By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/stock-market-news/spx-vulnerable-to-corrections-when-yield-curve-steepens-bofa-3654670 (Accessed: 9 October 2024).
