SPX at Risk of Corrections as Yield Curve Steepens, According to BofA

The S&P 500 (SPX) faces potential for significant corrections as the U.S. 2-year vs. 10-year yield curve steepens, according to strategists from Bank of America in a recent note. Historically, periods of yield curve steepening—averaging 25 months—are often linked with recessions and heightened market volatility.

Bank of America’s analysis shows that recessions have coincided with 10 out of the last 12 steepening cycles. During these intervals, the SPX’s performance has been mixed, with the index advancing 58% of the time and delivering an average annualized return of 5.7%. However, the firm also highlights that the largest corrections during these cycles typically average a notable 26.5%.

Since the current steepening cycle began in June 2023, the largest correction recorded was a 10.3% decline from late July to late October 2023. Comparatively, the average and median largest corrections during steepening phases have been 26.5% and 20.3%, respectively.

Bank of America cautions that a recession could escalate these corrections, with historical declines reaching as much as 56.8%. The firm emphasizes that the SPX is particularly susceptible to larger downturns when the yield curve is steepening. The ongoing 2s-10s cycle commenced in June 2023, bottoming at -1.06, after which the SPX rose 29.5% by the end of September 2024. However, given past trends, the market may not be shielded from larger corrections in the future.

On Monday, the U.S. 10-year Treasury yield crossed the 4% mark for the first time in over two months, coinciding with a brief inversion in a key segment of the yield curve. The increase followed adjustments in market expectations regarding a significant rate cut after a robust U.S. jobs report on Friday.

Investors were also bracing for $119 billion in upcoming auctions for three-year, 10-year, and 30-year notes, leading to some Treasury selling, which pushed prices down and yields upward. The U.S. 2-year yield, more sensitive to monetary policy shifts, climbed to its highest level since August 19, increasing by 7.4 basis points to 4.006%. Notably, it surged nearly 22 basis points on Friday, marking its largest daily rise since April.