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SPX vulnerable to corrections when yield curve steepens: BofA

Published 09/10/2024, 08:56
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect
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Investing.com -- The S&P 500 (SPX) is vulnerable to bigger corrections as the US 2-year vs. 10-year (2s-10s) yield curve steepens, Bank of America (NYSE:BAC) strategists said in a Tuesday note.

Historically, steepening cycles in the yield curve, which average 25 months in length, often accompany recessions and bring increased market volatility.

“Recessions have accompanied 10 of the last 12 steepening cycles,” BofA’s team notes.

The SPX’s performance during these periods is mixed, with the index up 58% of the time, delivering an average annualized return of 5.7%. However, BofA points out that the SPX’s biggest corrections during these cycles average a substantial 26.5%.

For comparison, the largest correction seen since the current steepening cycle began in June 2023 was a 10.3% drop from late July to late October 2023. The average and median biggest corrections during these periods were 26.5% and 20.3%, respectively.

BofA warns that a recession could trigger a deeper correction, with historical drops reaching as much as 56.8%.

“The SPX is vulnerable to bigger corrections when the yield curve is steepening,” BofA emphasizes. The current 2s-10s cycle began in June 2023 when the curve bottomed at -1.06, and by the end of September 2024, the SPX was up 29.5%. Yet, given the historical context, the market may not remain immune to larger corrections moving forward.

The U.S. 10-year Treasury yield surpassed 4% on Monday for the first time in over two months, while a key part of the yield curve briefly inverted. The jump came as markets dialed back expectations for another large rate cut after Friday's strong U.S. jobs report.

Investors were also preparing for $119 billion in auctions of three-year, 10-year, and 30-Year notes, leading to some selling of Treasuries, which pushed prices down and yields up.

The United States 2-Year yield, which is more sensitive to monetary policy expectations, reached its highest level since August 19, rising 7.4 basis points to 4.006%. On Friday, it jumped nearly 22 bps, marking its largest daily increase since April.

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