Tracking to Recession

2s10s historical accuracy, record shorts, carry unwind

Mobius Intel Brief:

August’s roller coaster ride of market interest rate sentiment transitioned from ‘imminent recession and 75 bps September cut’ after July’s job print to ‘possible 25 bps rate cut and likely soft landing’ after July’s retail sales figures.

Along the way, dovish participants have forgotten about one of the most accurate signals of an impending U.S. recession — the 2s10s spread — which has remained inverted for the longest stretch in history, reminiscent of 1981 and the months before unemployment reached nearly 11%.

While yen-funded carry unwind risks are substantially diminished, underappreciated trends in leveraged hedge funds’ fixed-income bets welcome significant volatility and liquidity effects if the Fed’s rate cut frequency and magnitude surprise median expectations.

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