Macro Rotation Phase II: Positioning for the Spread Resolution

Macro Setup

The 10Y/2Y yield curve inversion is resolving. Historically this marks the transition from rate-driven growth suppression to credit-spread-driven value outperformance. We are entering Phase II of the growth-to-value rotation.

This is not a prediction — it is a structural observation. The mechanism is the same across cycles: as the short end normalises down and the long end stabilises, the relative cost of capital for growth vs. value equalises, removing the duration premium that supported mega-cap growth for three years.

Signal Confirmation

Three signals must align before rotating aggressively:

SignalCurrent ReadingThreshold10Y/2Y spread-12bps> 0bps = Phase II confirmedIG credit spreads98bps< 120bps = soft landingPMI composite51.2> 50 = expansion

• 10Y/2Y spread compressed from -108bps (Oct 2023) to -12bps as of writing
• Credit spreads (IG at 98bps, HY at 298bps) are near post-GFC tights — not pricing recession
• PMI data showing mixed signals: manufacturing contraction at 48.1, services expansion at 53.4

Two of three signals are aligned. The PMI composite above 50 is the remaining confirmation.

Historical Analog Analysis

In both the 2000 and 2007 analog periods, the inversion resolution phase (defined as 10Y/2Y moving from -100bps to 0) took 14–18 months and was characterised by:

1. Growth underperformance in the final 6 months of inversion
2. Value outperformance beginning 3 months before the actual crossover
3. Credit spread widening arriving 6–9 months after the 0 crossover

We are approximately 4 months from the expected crossover at current pace. The optimal entry window for value-cyclical rotation is now.

Portfolio Implications

The playbook from the historical analogs suggests a three-phase approach: