The '10-2' Spread on Treasuries Points to a Recession

The '10-2' Spread on Treasuries Points to a Recession

Yields on long-term U.S. government bonds are rising, indicating trouble ahead.

Reviewed by: Staff
Edited by: Mark Nacinovich

Every Sunday, fans of the National Football League root for their team to win with one eye, while watching their game wagers with the other. Point spreads and fantasy leagues are part of the reason the NFL has become immensely popular.  

With sports metaphors already dominating stock market lingo, here’s one for bond investors: The yield curve is in the process of covering the spread. And what will they win? Probably a recession. That makes bond ETFs the new stars of the financial gridiron. 

At, we’ve chronicled the historic degree to which the yield on the two-year U.S. Treasury note exceeded that of the 10-year U.S. Treasury bond. In June, the “10-2 spread” exceeded -1.00% for the first time since 1981, the same year the Oakland Raiders beat the Philadelpha Eagles in the Super Bowl. 

Recession Predictor  

That spread has quickly narrowed to 0.14% as of last Friday. Eight of the last eight recessions commenced not long after the yield curve reverted to its normal status, with the 10-year rate above the two-year. With long-term bond ETFs dominating headlines for the wrong reasons—long-term rates surging higher in a manner that has produced massive confidence issues for global markets and breathtaking drops in value of a supposedly “safe” asset class, this latest development should get prime time attention into November.  

Another closely watched yield curve spread involves the 10-year and the three-month U.S. T-bills. That hit an all-time low in July, crashing to -1.90%. It has sped back to -0.65% just four months later, a further indication that the bond market may be giving us its version of the two-minute warning. 

There are no guarantees in investing, and yield curve reversion may not go nine for nine. But this is where investment advisors need to understand what is happening, the historical significance of it and how quickly things can run amok in markets when risks ultimately get realized. 

Win-Win for Advisors and Clients 

Advisors and their clients are the winners with this development, whether a recession officially arrives or not. If someone is using an advisor, they likely have sufficient wealth to take advantage of higher rates across the curve, rather than be heavily affected by inflation and higher borrowing rates.  

They are essentially the lender now, and they can lend their hard-earned wealth at rates they haven’t had for more than a decade. That creates an ideal moment to convey that and empower clients, while personalizing the discussion. This is a moment advisors cannot let pass by, simply talking about “asset allocation” without focusing on the unique history we are living through in the bond market. 

TLT as a Proxy 

The iShares 20+ Year Treasury Bond ETF (TLT) has become a popular proxy for “long term Treasury bonds” but the SPDR Portfolio Long Term Treasury ETF (SPTL) covers bonds from 10 years to maturity and longer. TLT starts at 20 years out. SPTL is a $6.7 billion ETF that had never fallen more than 21% from peak to trough in its history until the last couple of years.  

SPTL is 43% off its August 2020 high (inclusive of dividends), a remarkably steep decline that has many investors thinking “comeback” a la Tom Brady and the New England Patriots against the Atlanta Falcons in the 2017 Super Bowl. 

At the other end of the 10-2 spread are ETFs like the $313 million RBB Fund Inc. - US Treasury 2 Year Note ETF (UTWO), one of a set of new exchange-traded funds that own one single position. That part of the yield curve has struggled to produce positive returns for the past three calendar years, but UTWO has managed a gain so far this year.  

And with the shorter end of that 10-2 spread having stalled around the 5% area, the benefits of sitting on the proverbial sidelines with a chunk of client assets might look interesting to many advisors.

The bond market is threatening to beat the spread that has forestalled a recession. We’ll find out soon if the winning (losing?) streak continues.  

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.