Long-Short Yield Dynamics & Market

This chart overlays the Wilshire 5000 Total Market Full Cap Index with fitted yields on 10-year and 2-year Zero Coupon Bonds, along with the difference between 10-year Treasury Constant Maturity and 2-year Treasury Constant Maturity rates. Together, they present a comprehensive view of market dynamics through the lens of bond yields.

• Zero Coupon Bond Yields: These provide insight into short-term (2-year) and long-term (10-year) investment horizons, reflecting how the market perceives risk and reward over these periods.

• 10-Year vs 2-Year Treasury Constant Maturity: The spread between these two indicates the yield curve's slope, often signaling economic outlook.

In times of stability, a healthy premium for longer-term investments is often reflected in a steep yield curve and a robust Wilshire 5000 Index. However, during economic uncertainty, the yield curve can flatten or even invert, typically signaling a more bearish outlook and potentially reflecting in a downturn of the market index.

In sum, these charts offer a compelling tool to "take the temperature" of the market, allowing for more informed decisions based on the interplay between short and long-term bond yields.

Potential Interpretations:

• Positive Scenario: When the yield on 10-year bonds surpasses the yield on 2-year bonds (creating a positive yield curve) and the Wilshire 5000 Index is climbing, it signals a buoyant market. This scenario reflects investors' confidence in long-term economic stability, embracing more risk for longer-term gains.

• Negative Scenario: A scenario where the yield on 10-year bonds dips below 2-year bond yields (yield curve inversion), coupled with a descending Wilshire 5000 Index, flags potential storm clouds on the economic horizon. Yield curve inversions can be an economic siren, signifying investors' demand for higher short-term returns due to rising uncertainty.

• Cautionary Scenario: At times, the yield curve might flatten, indicating comparable yields for both short-term and long-term bonds. This, coupled with a volatile Wilshire 5000 Index, suggests a state of flux in market sentiment. A flat yield curve often implies investors are uncertain about future economic prospects, warranting caution and close monitoring of market indicators.