Question

4. The Treasury yield curve inverted earlier this fall, causing alarm that a recession was imminent. Although it has moved back to a more normal configuration, the spread between the 10-year and 2-year notes remains very small. Is this consistent with a stock market that is setting new highs? Explain.

Answer 1

Yes, it is consistent with markets setting a new high.

Explanation:
spread is the gap of returns between returns of two alternative investments having different having a different maturity.

Generally
1. spread is narrow during normal/good times (that is when investors sentiment are good).

Because investors are ready to take the risk during good market sentiment for a less increase in return.
Hence narrowing the spread.

2. spread is widened during recessions (that is when investors sentiment are bad to worst).

Where, during recessions, the investors become very much risk-averse hence they would want a much higher return for a little increase in risk.
This results in spread becoming widened.

As the spread between 2 year and 10-year notes is very small (narrow), it is a good sign for the stock market.