10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity—often referred to as the 10-2 Yield Spread—is one of the most closely watched economic indicators. It measures the difference between the yields of two U.S. Treasury bonds: the 10-year bond (long-term) and the 2-year bond (short-term). When this yield spread narrows or becomes negative (known as an inversion), it can signal concerns about future economic growth and is often seen as a precursor to a recession.

Overview: What is the Yield Spread?

To understand the yield spread, it’s essential to grasp the basics of bond yields. Bonds are debt instruments issued by governments or corporations to raise capital. When an investor buys a bond, they are essentially lending money to the issuer in exchange for regular interest payments (called the bond’s yield) until the bond matures, at which point the principal is repaid.

U.S. Treasury bonds, issued by the U.S. government, are considered some of the safest investments due to the government’s ability to print money and collect taxes. Treasury bonds with different maturities (like 10-year and 2-year) will offer different interest rates, known as yields. Typically, longer-term bonds (like the 10-year) offer higher yields than shorter-term bonds (like the 2-year) because of the additional risk of lending money for a longer period.

The 10-2 Yield Spread is the difference between these two yields. When the economy is expanding, investors typically demand higher yields on long-term bonds due to expected inflation and growth. However, when investors become concerned about the economy’s future prospects, they may prefer the safety of long-term bonds, driving their yields lower relative to short-term bonds. This can lead to an inversion of the yield curve, where the 2-year bond offers a higher yield than the 10-year bond.

A Brief History of the 10-2 Yield Spread

The 10-2 yield spread has historically been an important signal for economists and investors. Its predictive power for recessions has been especially notable. Since the 1960s, every U.S. recession has been preceded by an inverted yield curve. However, the time lag between inversion and an actual recession can vary, typically ranging from 6 to 18 months.

Notable examples include:

• 1980s Recession: The yield curve inverted in 1978, signaling the double-dip recession that followed.
• 2000s Dot-com Crash: The yield curve inverted in late 2000, followed by the bursting of the dot-com bubble and the subsequent recession.
• 2008 Financial Crisis: The yield curve inverted in 2006, signaling the severe financial crisis that would emerge two years later.
• COVID-19 Recession: In 2019, the yield curve briefly inverted, marking concerns about slowing global growth even before the pandemic-triggered economic collapse in early 2020.

How the 10-2 Yield Spread Relates to the Price of Bitcoin

Bitcoin, the world’s leading decentralized digital currency, operates outside traditional financial systems. While Bitcoin’s price is influenced by a variety of factors—such as adoption, regulatory news, and technological developments—macroeconomic indicators like the 10-2 yield spread can also have a notable impact on investor sentiment in the crypto market.

Economic Sentiment and Bitcoin’s Role as a Hedge

As a relatively new and highly speculative asset class, Bitcoin is often seen by some investors as a hedge against traditional financial markets. When the 10-2 yield spread inverts, signaling concerns about economic slowdowns or potential recessions, investor appetite for alternative assets like Bitcoin can increase.

For example:

• Flight to Safe Havens: When the yield curve inverts, signaling potential economic trouble, investors traditionally seek safe-haven assets like gold. Bitcoin, sometimes referred to as “digital gold,” may attract similar attention as investors diversify away from traditional assets.
• Liquidity Impact: In periods of economic instability, central banks (like the Federal Reserve) may lower interest rates to stimulate growth. These periods of monetary easing can result in excess liquidity in the financial system, which has historically led to higher prices for both risk assets (like Bitcoin) and safe-haven assets.

Bitcoin’s Behavior During Yield Curve Inversions

While Bitcoin’s historical price data is limited relative to the long-term history of yield curves, some correlations can be observed between yield curve inversions and Bitcoin price movements:

• 2019 Yield Curve Inversion: In 2019, when the yield curve inverted, Bitcoin’s price surged. Some interpreted this as a sign that investors were viewing Bitcoin as a store of value amidst concerns about slowing economic growth.
• Pandemic Period: In the aftermath of the COVID-19 pandemic, as central banks flooded the economy with liquidity and yields on long-term bonds fell, Bitcoin’s price experienced a significant bull run, hitting all-time highs in late 2020 and 2021.

Unlike traditional assets, which may respond predictably to economic signals, Bitcoin’s market can be influenced by external events such as regulatory changes, institutional adoption, and broader crypto market cycles.

Conclusion

The 10-2 yield spread is a powerful tool for understanding potential shifts in the economy, particularly its ability to predict recessions. Historically, an inverted yield curve has preceded significant downturns in the U.S. economy, offering investors valuable insight into future economic conditions.

While Bitcoin is a highly speculative asset, there is evidence that economic uncertainty—as signaled by the yield curve inversion—can drive increased demand for alternative investments, including Bitcoin. Bitcoin’s relationship with macroeconomic indicators like the 10-2 yield spread will likely remain a focal point for investors seeking insight into broader market trends.