Article
Three scenarios, five signals, and how to size the rotation without being early
54d · 2 min read
The 2022–2024 inversion was the deepest since 1981 (peak: -108bps on 10Y/2Y in Oct 2023). The normalisation is now underway. This is not a call that the inversion is over — it is a framework for positioning as the inversion resolves, however long that takes.
The critical insight: in every prior inversion resolution (1989, 2000, 2007, 2019), the optimal entry into the rate-rotation trade was before the actual 0 crossover, not after. Waiting for confirmation is expensive.
I track five signals to determine where we are in the normalisation cycle:
SignalCurrentThresholdStatus10Y/2Y spread-12bps> 0bpsApproachingIG credit spreads98bps< 130bps✓ GreenHY credit spreads298bps< 400bps✓ GreenISM Manufacturing PMI48.1> 50✗ AmberISM Services PMI53.4> 52✓ GreenFour of five signals are in the positioning-is-appropriate zone. The manufacturing PMI is the outstanding risk. A services PMI above 52 with a manufacturing PMI below 50 historically resolves upward within two quarters.
Base case (60% probability): Soft landing with 2 Fed cuts
Bull case (25% probability): Early pivot, spreads tighten further
This content is for informational purposes only and should not be considered financial advice.
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Bear case (15% probability): Stagflation re-emergence
Based on the base case (60%), the implementation is:
Entry (current to 10Y/2Y crossing zero):
At crossover:
Post-crossover (credit spread watch):
Conviction sizing rules I follow in this environment:
Author holds SPY put spreads and a small XLF position at time of publication. No position in QQQ.
Macro scenario analysis is inherently uncertain. Probability estimates are subjective and not derived from quantitative models. This is not financial advice. Rate environments can change rapidly.
Top-down macro framework using five observable signals: yield curve spread, IG/HY credit spreads, and ISM manufacturing/services PMI. Scenario probabilities are subjective estimates based on historical base rates.
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