A major threat to stocks is cropping up for the second half of 2018

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A major threat to stocks is cropping up heading into the second half of 2018

Call it the incredible flattening yield curve.

The narrowing between the 10- and 2-year Treasury bond yields has intensified this year, leading investors to fear a yield-curve inversion — a development that’s traditionally presaged economic recessions.

That’s precisely why the yield curve — and what it implies for the stock market — will be a key measure to watch as the market heads into the second half of the year, said Craig Johnson, chief market technician at Piper Jaffray. He explained on CNBC’s “Trading Nation.”

• The 10-year/2-year Treasury yield curve has flattened to around 32 basis points, its narrowest spread since 2007. This comes as the Federal Reserve’s hawkish stance has sent short-term yields rising, while longer-term rates have not kept pace.

• A flattening curve has historically suggested slowing economic growth, and any inversion that may develop (in which a shorter-term note yields more than its longer-term counterparts) has been a hit to equities.

• This flattening will negatively impact the financials sector, already under pressure this year, and will pose a threat to the broader market heading into the second half of the year.

Bottom line: The yield curve will pose a threat to stocks in the second half of the year, according to Johnson.