Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / The Yield Curve Uninversion What History Says Next
Transcript
- Lucas: So here's a statistic that quietly matters more than the VIX or the Nasdaq correction: the yield curve has been positively sloped for over a month now. As of today, June 11, the 10-year Treasury is at 4.53 percent, the 2-year at 4.13. That's a spread of 40 basis points. Not huge, but it's positive, and it's stayed positive for long enough that we have to talk about what usually happens next. Luna: Right — because for most of 2024 and 2025, that curve was deeply inverted. The 2-year was yielding more than the 10-year. That's the classic recession warning. Lucas: Exactly. And every recession since the 1970s was preceded by an inversion. But here's the part that a lot of people forget: the actual recession almost never starts while the curve is inverted. It starts after the curve un-inverts — after the 10-year moves back above the 2-year. You get this period of false calm. Luna: So the uninversion itself can be a bearish signal, not a bullish one. That's counterintuitive. Lucas: It is, and it's one of the most reliable patterns in macro. Let me walk through the numbers. In 1990, the curve inverted in early 1989, un-inverted in May 1990. The recession started in July 1990. In 2001, inversion started in mid-2000, un-inverted in January 2001. Recession began in March 2001. In 2008, inversion peaked in 2006, un-inverted in mid-2007. Recession started in December 2007. Luna: So the lag is usually a few months. But in all those cases, the S&P 500 actually rallied for a while after the uninversion before the downturn hit. Lucas: That's right. From uninversion to the start of recession, the S&P 500 gained roughly 8 percent on average across those three episodes. So the market gives you a head fake. It looks like the coast is clear, bond yields stabilize, the economy feels okay — and then the contraction arrives. Luna: That's unsettling because that's exactly the environment we're in right now. The curve is positive, the S&P is down only 1.3 percent over the last five days — not catastrophic. The Nasdaq is down a bit more, 1.6 percent. But the Russell 2000 is actually up 1.4 percent. Lucas: That small-cap strength is worth noting. The Russell divergence has been a recurring theme on this show, and it's still there. Small caps are telling you that the domestic economy might be more resilient than the tech-heavy Nasdaq suggests. But the yield curve is telling you to stay cautious. Luna: So which signal do you trust more? The Russell saying 'we're fine' or the bond market saying 'watch out'? Lucas: I think you have to respect the bond market's track record. The yield curve has predicted every recession in the last 50 years with only one false positive — the inversion in the late 1960s that didn't lead to a recession until 1970. But the timing is the hard part. The curve doesn't tell you the recession starts next month. It tells you the risk is elevated. Luna: And this time, the GDP data complicates the picture. Real GDP growth annualized is 1.6 percent as of Q1 2026. That's slow, but it's not negative. We're not in recession yet by any official measure. Lucas: Right. And the 10-year yield has actually dropped a few basis points this week, from 4.56 to 4.53. That suggests the bond market is pricing in a slower economy, not necessarily a crash. The 2-year fell too, from 4.15 to 4.13. So the curve is flattening slightly, but still positive. Luna: One thing I keep coming back to: the VIX is at 21.28, which is elevated but not panic territory. And the VVIX — the volatility of volatility — is at 108, up 6 percent in five days. That's a big move. The options market is hedging for tail risk. Lucas: That's a great point. The VIX at 21 says 'I'm nervous.' The VVIX at 108 says 'I'm nervous about how nervous I might get.' That's the kind of cross-signal that makes a yield curve uninversion feel more like a yellow flag than a red one. Luna: You know, speaking of signals that deserve more attention — if our conversations about market signals and economic indicators have helped you think about your portfolio or your financial decisions differently, that's exactly the kind of response we hear from listeners. And it's why we keep this show ad-free and independent. Lucas: Yeah, listener support is genuinely what makes that possible. If you find value in episodes like this one — where we dig into a specific data point and try to understand what it means — and you'd like to help keep the show going, you can support us at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure, just a way for those who want to chip in. Luna: Right. And every bit helps us stay focused on the numbers and the context, not on selling ads. So thank you to anyone who's already supported. Lucas: Okay, back to the curve. So we have this historical pattern that says the post-uninversion period is dangerous, but we also have real-time data that doesn't look like the precipice of a recession. The VIX is high but not screaming, small caps are gaining, GDP is still positive. How do you square that? Luna: I think you have to look at the nature of the recession risk. In 2008, the financial system was levered to the hilt. In 2001, tech valuations were absurd. In 1990, it was a credit crunch after the S&L crisis. Each had a specific trigger. Lucas: And right now, what's the trigger? Inflation is still above target but coming down. The Fed has been holding rates steady. The labor market is showing some cracks but nothing like a wave of layoffs. Earnings have been mixed but not collapsing. Luna: So maybe this time really is different — or at least, the recession isn't imminent. The yield curve could be sending a warning for late 2026 or 2027, not next month. Lucas: That's my base case. The curve un-inverts, the economy slows but doesn't contract for another two or three quarters. The stock market might grind sideways or correct another 5 to 10 percent, but a full bear market isn't guaranteed. The key is watching credit spreads, corporate earnings, and the jobs data. Luna: And the VIX term structure. If the VIX curve inverts — meaning near-term volatility is higher than longer-term — that's a more urgent signal. Lucas: Exactly. Right now, the VIX term structure is still in contango — future months are higher than spot. That suggests the market expects volatility to rise later, not immediately. That's consistent with a 'slow bleed' scenario, not a crash. Luna: So for the average investor, what do you do? Adjust portfolio allocation? Hedge? Just sit tight? Lucas: I'd say don't make big directional bets based on the yield curve alone. The signal is real but the timing is fuzzy. What you can do is check your portfolio's sensitivity to an economic slowdown. If you're heavy on cyclical stocks — industrials, materials, consumer discretionary — maybe trim a little and add some defensive exposure. Utilities, healthcare, consumer staples. Not a full rotation, just a tilt. Luna: And bonds? The 10-year at 4.53 still offers a decent yield. That's a positive carry even if yields move a bit higher. Lucas: Yeah, I think bonds are actually attractive here for income, not for capital gains. If a recession does hit, yields will fall and you'll get price appreciation. If no recession, you collect 4.5 percent. That's a decent risk-reward. Luna: Alright. So the yield curve uninversion is a yellow flag. Watch the data, don't panic, but don't ignore it either. Lucas: Exactly. History says be cautious, but history also says the market can rally for months after the uninversion before anything bad happens. The worst thing you can do is sell everything and miss that rally. The second worst thing is to ignore the signal entirely and get caught off guard. Luna: It's a balancing act. And as always, knowing the data — the VIX, the curve, the Russell divergence — helps you make a more informed call. Lucas: That's the whole point of this show. We'll keep tracking the signals. Next week, I want to look at the gold slump — gold hit a six-month low today even as inflation fears are still in the headlines. That disconnect is worth a deep dive. Luna: I'm curious about that too. Gold usually loves inflation and falling real rates. Something's off. We'll dig into it. Lucas: Sounds good. For now, keep an eye on the 10-year, and we'll talk soon.