Bear Steepening

In an apparent concession to the season, the bond market seems to grow darker by the day. The latest trend is what bond geeks and ghouls call a “bear steepening”, which refers to short and long term yields converging by the latter rising … short term yields rising less than long term yields so that the difference diminishes.

[2023 1023 edit: The original version of this post referred to a “bear flattening” because the curve has actually flattened from a deeply inverted or downsloping configuration. Nevertheless, bond jargon refers to it as “steepening” because the slope has increased; less negative being more positive.]

In spite of a twenty year auction spun as “strong”, bond prices fell again on the day across most of the maturity spectrum. It’s not clear just how high yields will have to go to keep supply and demand in balance. That supply is an issue is finally being acknowledged in a mainstream media that at first held fast to the notion that it was all about the market belatedly taking the Fed’s “higher for longer” mantra at face value. Such Fed rhetoric can explain why yields up to around two or so years have moved higher, but it’s a bridge too far to extrapolate overnight rate targets decades hence. As I’ve long maintained, nothing the Fed has said or reasonably could say would commit it to any given rate policy more than a few meetings out. To the contrary, the Fed itself has begun to soften its line, likely paling at the horror show in the bond market.

This isn’t to say Fed funds won’t be higher than zero five or ten years from now. It’s to say nobody could know. The Fed included.

The specter of unprecedented supply on the other hand is no matter of speculation. It’s a fact in the here and now. The net increase in federal debt has been running in excess of a trillion dollars per quarter with no end in sight. The twenty and thirty year yields both broke 5% today for the first time in decades, closing most of the gap with their short term doppelgängers. The scary numbers:

1Y – 5.47%
2Y – 5.19%
3Y – 5.03%
10Y – 4.91%
20Y – 5.20%
30Y – 5.00%

US Treasury – Par Yield Curve

We’ve long been on alert for the yield curve to begin to flatten, but imagined short yields falling into line with the long, not the other way around.

Even the stock market is getting spooked. Ever see one of those comedy gags where an actor in the mirror almost exactly mimics the protagonist’s every move? Stocks are playing the role to a T. Almost every zig and zag by the bond market is mirrored by the stock market. Except that on the whole stocks have barely dug a shallow grave next to the descent of bonds into the depths of Hades.



Yet. It’s hard to imagine Wile E Coyote indefinitely remaining suspended in mid air without ever looking down.

36 thoughts on “Bear Steepening

  1. jk says:

    we’re looking more like an em every day. any guesses how high the 10yr will have to go to really break the equity market? i don’t know the number, but i think that’s where we’re going. the only thing i can imagine preventing that is if janet has more disorderly, long-tailed auctions first. [dealers were stuck holding 18% of last week’s 30yr sale.]

    1. Bill Terrell says:

      Guesses would be the right word for it. There’s been chatter about a “psychologically significant” 5% threshold. But most of the yield curve is already there – including both shorter and longer maturities. And for most of last year bonds dragged stocks down at much lower yields. For that matter, they’ve tracked much of this year too, just not nearly as much downside in stocks as bonds say there “should” have been.

      Best guess right now is that the closing of the gap won’t be triggered by a particular level so much as by an event … some kind of financial blowup or clear inflection in economic data. Then the reaction could seem disproportionate, but only because it’s fallen far behind and needs to make up lost ground.

      Maybe it’s already under way now. Stocks last peaked July 31 and have been working their way down since. But bonds have too … I’m watching for stocks to start selling off while bonds rally. We’ve seen a day or two here and there but nothing that gained any traction. When it does, the move could be pretty big. Stock valuations are in the neighborhood of where they were in 2000 with bond yields not far from their 2000 levels as well.

      Of course deficits aren’t anywhere near their 2000 levels.

  2. Bill Terrell says:

    One thing that might help explain the stock market’s failure to decline proportionately to the bond market so far is the tendency of many investors to allocate to target proportions, eg 60-40. Somebody has to hold every bond issued, so all else being equal if the government adds a trillion to the bond market cap, investors as a whole become overweight bonds. Their attempts to rebalance tend to increase the stock market cap. In this way, government deficits exert upward pressure on stock prices.

    This is of course offset by lower bond prices and higher yields, so it’s not a one way street, just another factor in the mix. It’s not necessarily sustainable, either, as investors can always change their allocations.

    It’s also noteworthy that gold, typically correlated with Treasuries, has been going its own way – up – as bonds continue to fall. This is a tentative indicator Treasuries, at least for the time being, are losing their flight-to-safety attraction.

  3. jk says:

    investors who are stuck in the [now defunct and irresponsible imo] paradigm of 60/40 need to sell equities and buy more bonds as the bond market collapses. maybe that’s beginning to bite and could explain recent stock market weakness.
    i think fiscal dominance/bond-oversupply is the theme. the ever-growing landslide of coupons, extending into the future as far as the eye can see, is burying the long end.
    rumor has it janet will issue more bills and further drain rrp in order to contain long end issuance. according to fred rrp is down to about 1.1 trillion dollars from a peak of 2.2 trillion.
    but treasury is issuing over $5 trillion per quarter, including rollovers. [i think we have to include rollovers in our thinking as current rates are so much higher than when maturing notes and bonds were issued.] so replacing coupons with bills is to some extent limited by the rrp.
    increased treasury issuance will continue to crowd out other credit. banks are already squeezing loan issuance because of their own hold-to-maturity impairments and deposit flight. deposits are continuing their “bank walk” [slow motion bank run, h/t jim bianco], which does help absorb t-bills.
    buckle up.

    1. Bill Terrell says:

      Right … 60-40 was just an example to illustrate the point that many investors follow a proportional (percentage) allocation strategy, and how that tends to equilibrate stock and bond market caps and in turn result in massive bond issuance putting upward pressure on stock prices. Pension funds are a prime example … often rebalancing towards set target allocations. It’s an important mechanism that helps explain the otherwise inexplicable divergence between stock and bond valuations. Of course it doesn’t apply to all investors all the time … giving rise to the potential for a sharp readjustment when enough discover they’re offsides and take remedial action.

      You have to wonder what Janet “Go big” Yellen is thinking. A rational TSec would presumably be in her boss’s ear daily about the deepening Treasury market crisis. But last I heard she was bragging about how the US could fund both war with Russia and in the Middle East no problem. Not exactly what the bond market wants to hear. If this is the kind of thinking you get with an Econ PhD let’s please have someone less qualified.

      No question there’s a lot of crowding out going on. Ask anyone trying to buy a house or car. One way or another, through the loss of ability to affordably borrow money or loss of value of the money itself or both, their purchasing power is being hoovered up by the US Treasury.

      Even the Fed can’t stem the loss, only determine how it is split. How much further does this bond market debacle go before it steps in to suppress surging yields? With rate relief of course coming at the expense of a new leg down in the purchasing power of the dollar. You can have lower rates but only at the expense of another surge in inflation. Or Washington can do some belt tightening. Likely we’ll get some of all of the above.

  4. jk says:

    when “something breaks” badly enough for the fed to reverse qt to qe again, probably under some other name, i wonder if they will go to frank ycc, as in the ’40s-’50s. that’s what we really need [i’m sad to say], along with other measures of financial repression. there’d be a big burst of inflation which would lower the nominal debt relative to nominal gdp.
    btw, i think the wars are just icing on the cake. we’d basically be in the same situation without the wars.

    1. Bill Terrell says:

      It’s virtually inevitable. We’ll get some kind of debt monetization. The gravest outcome would be if that’s all we get. If it’s not part of a broader effort including fiscal restraint, it’s an existential threat.

      The contingent focusing on monetization as the solution is missing the source of the problem. This is not a post-WWII circumstance. We don’t have excessive debt because we just won a world war, we have excessive debt because years of ultracheap borrowing enticed politicians into it. Attempting to solve the problem with more of the same would be like trying to cure an alcoholic with more booze.

      The analogy is doubly fitting because of the risk of DTs. The addiction is so severe cold turkey isn’t an option either. There will have to be some debt monetization. But like unlimited booze, no-holds-barred debt monetization would unleash a death spiral.

      The Fed knows this too … it’s the unspoken subtext of its “higher for longer” line. It will monetize, but limit it enough to keep pressure on fiscal policy. It will at least tap on the brakes as this thing goes careening down the slope towards the bottomless canyon. The Fed’s prime mission is its own survival and the death of its host would kill it too.

    2. Bill Terrell says:

      BTW of course these two wars are far from the only problem. Their mention here was to highlight the blockheaded attitude of the very official whose job it is to protect the Treasury and advise on the president on fiscal matters.

      But cumulatively wars have been a disaster. Vietnam, Iraq, Afghanistan … besides the loss of life and limb they’ve collectively cost trillions with little if any apparent return. They’re not even transfer payments; they represent expenditure of resources to destroy resources.

      Even entitlements are overblown as ostensibly intractable problems. Everything put in place before 2000 could easily be made sustainable. The real trouble is we keep adding new ones. And if it wasn’t for the previous blockhead we could have locked in enough long term financing to buy time to put in place permanent solutions. But no … let’s survey Wall Street and supply the maturities that best satisfy its funding desires.

  5. Mega says:

    Why is America at war with Europe?
    Russian Gas pipelines blown up
    African gas pipelines stopped in Niger
    Israeli gas production stopped

    ……………….i hate to be all “Alex Jones” but am i missing something?

    1. Bill Terrell says:

      I don’t know, Mega. I’m not a foreign policy guy, but it seems to me Washington has squandered decades of missed opportunity to get along better with Russia. Better relations might have improved America’s position with troublesome areas like North Korea and Iran, even China. Putin may be no Gandhi, but he’s no Hitler either. Looks like he’s playing defense. Russia doesn’t want NATO on its doorstep any more than the US would want its bases in Canada, Mexico, or Cuba. The one thing I know with certainty though is that the war contingent has never connected the dots and explained how its involvement improves the lives of Americans or even their children and grandchildren. At least nowhere close to justifying not only the economic cost but the risk of world war and possibly even nuclear war.

  6. Llanlad says:

    If the US is behaving like an EM and going to monetise its debt doesn’t that explain why stocks are elevated and potentially heading higher rather than lower?
    The Argentinian market is up 400% this year by comparison.

    1. Bill Terrell says:

      Thanks for raising this point, Llanlad. It highlights one of our pet themes about the dependency of market movements on your choice of pricing units.

      In this case, up by 400% in what units? Priced in a plunging peso, just about everything looks up. Loaves of bread have been an outstanding investment. Shiny rocks even better.

      Priced in dollars it’s a less impressive 19.9%, using ARGT as a proxy. Priced in gold less still. Even most of the US stock market’s price appreciation over the past 100 years has been an artifact of using a depreciating pricing unit … the USD:

      Making Stock Market History

      It also supports the notion that stocks are an inflation hedge.

      Argentina may also be benefitting from potential economic reform. Its leading presidential candidate, Javier Milei, is said to be an Austrian school economist that has proposed closing the central bank. Maybe Argentinian voters have finally had it with inflation ruining their once prosperous economy.

      1. Milton Kuo says:

        >Javier Milei, is said to be an Austrian school economist that has proposed closing the central bank. Maybe Argentinian voters have finally had it with inflation ruining their once prosperous economy.

        From the “liberal” media, the knives are out for Milei and they are attacking his proposed economic policies.

        After seeing the mess in the U.S. with its seemingly infinite government and quasi-government jobs, many of which seem to be of dubious value with hiring practices that are even more dubious, I’m not surprised to see articles written by people on the government dole that are negative on Milei’s plans. Last I checked, Nature doesn’t have any credible record on economic policy or analysis.

        That is not to say that Milei’s plan is necessarily good. I have no idea what kind of people work in Argentina’s public sector but I seriously doubt Nature does either. If science is so critical for Argentina’s success, why is their economy still a wreck? Nature cannot seem to answer that very critical question.

        It seems to me that as you eliminate exemptions from bad government policy for more and more people, there is a far greater likelihood that bad government policy will cease to continue.

        1. Bill Terrell says:

          Milei’s econ platform sounds solid in principle, but there are legitimate questions about implementation; it would likely be a disruptive transition. Most of the media doesn’t even try to conceal its bias though, branding Milei with what it regards as the biggest pejoratives it can muster; “hard right”, “ultraconservative”, “radical libertarian”, aka anything that doesn’t hew to its corporatist—statist-globalist dogma. Its solution is apparently if what you’re doing isn’t working, do it harder.

        2. Milton Kuo says:

          Javier Milei has won the presidential election in Argentina. Now we’ll have to see if he really tries to implement a more Austrian school economic policy and, if he does, how Argentina’s economy will fare.

          I suspect that if Milei keeps his promises, Argentina’s economy will have to suffer for a year or more before price stability occurs. During that period, he may be under a lot of pressure to go back to the old ways of mismanaging the currency and economy.

          1. Bill Terrell says:

            Wow, thanks, Milton. Big news. Agree Milei faces an uphill battle. After decades of economic sugar and booze, protein and vegs are a pretty big adjustment. Maybe the better metaphor is drug withdrawal. You can get worse before you get better, especially if you try and go too fast. Regardless of the merit of his philosophy, his skill as a manager and leader will be tested.

            1. Milton Kuo says:

              I had originally written something about how I thought that Herbert Hoover probably wouldn’t have had such a disastrous presidency had he either chosen to stay with the “liquidate everything” policy (let deflation take its course) or go for and stay with some sort of highly inflationary, stimulative policy. Instead, he seemed to be rather wishy-washy about the whole thing and it prolonged what would have been a nasty depression into The Great Depression.

              In a sense, FDR ran into a similar problem in 1938.

              My gut feeling is that maybe the U.S. would have been better off letting a deflation run its course with some government intervention to prevent people from starving to death. As it is, FDR’s alphabet soup of government agencies has set the stage for the mess we have today where there are too many unelected officials messing with things and too many federal government employees whose vote is influenced by the sources of their incomes.

              I think Milei may end up being something of an Argentinian Herbert Hoover if he’s not careful. The difference being that Argentina will face austerity initially and, if they can’t take it, they won’t face a long, grinding deflation. They’ll probably just hyperinflate again wiping out every saver who keeps his savings denominated in pesos and/or in Argentinian banks.

              1. Finster says:

                It’s worth remembering that we had no depression worthy of being called “Great” until we started a central bank. Even in the sixties we were taught in school how the Soviet model of economic central planning was inferior to our free market model. Yet there we were, right here in the Land of the Free, hosting the world’s most powerful agency of central planning. We would never permit oil companies to collude to target the price of oil, or computer companies to fix the price of operating systems, but when it came to allowing banks to collude to set the price of credit, we promoted and celebrated it.

                I don’t think this is taking an extreme view. I accept the desirability of having a safety net, even have written approvingly of a UBI. But having an alphabet soup of agencies administering a byzantine patchwork quilt of programs that both overlap and leave gaps is ultimately untenable.

                As is the nearly universally popular assumption that one size fits all and that all policy should be decided in the District of Columbia; that what’s good for San Francisco California is good for Toledo Ohio. Collecting all the levers of power in one place just makes it more convenient for the powerful to manipulate.

                Argentina is fascinating not only in its own right, but in what it portends for America.

              2. Finster says:

                The news has been good for a 20% pop in my one Argentinian stock, CRESY. I don’t subscribe to the financial media assumption that whatever makes stock prices go up is good for the economy, but in a country where business has been struggling along with most of the population, it could be a positive sign.

                1. Milton Kuo says:

                  I don’t know the real situation in Argentina with regard to how much businesses are taxed and how big the welfare state is but this seems…irrationally exuberant. 🙂 If Milei is an honest politician and if he is able to put Argentina’s finances in order (thus resulting in a sturdy peso), I suspect its businesses and citizenry will do well. However, before that occurs, I would expect a decrease in business.

                2. Finster says:

                  The rally was broad … I think YPF was up 40%. Milei had apparently proposed to privatize this state owned oil company. The broader market was up over 11% based on the Argentinian ETF ARGT.

                  Absolutely the near term impacts are likely negative. There are also questions about how much support his policies will find in the legislature. Markets are apparently looking at the longer term. If Milei is successful in reversing the inflation and malaise of several decades of decline, implementing even half of his Austrian agenda, compared to the status quo economic prospects will be so bright they’ll have to wear shades.

                  Argentina was once a prosperous nation. It could be again.

            2. Milton Kuo says:

              It seems Milei is serious about cutting government costs. He has eliminated 12 ministries, going from 21 to 9.


              After saying he was going to have Argentina USDollarize and be an ally of Israel (whatever that means), I thought he was going to reveal himself as a cookie cutter establishment politician that follows whatever the U.S./NATO/Wall Street tells him to do.

              Milier might be the Real Deal when it comes to moving away from quasi Keynesian economic policy.

              1. Finster says:

                I had the same initial reaction. But what do I know about Argentinian foreign policy? I didn’t doubt Milei’s intent, but don’t know about his ability to implement it either. What powers does the president have in Argentina? If he has the power to unilaterally do whatever he pleases, that’s a problem in itself. A good dictator will eventually be replaced by a bad one.

                If he doesn’t, he’s going to have to work with a lot of establishment people. Not necessarily a bad thing; sudden revolutions can get messy and if this is to have staying power he won’t have forever to demonstrate improvement.

                Dollarization is a double edged sword. It’s swapping one central bank for another. No question the US dollar is better than the Argentinian peso, but unless US fiscal policy takes a turn for the better, it’s not clear how long monetary policy can hold out. How ironic if Argentina dollarizes only to have the dollar pesoize.

  7. jk says:

    Things fall apart; the centre cannot hold;
    Mere anarchy is loosed upon the world,
    The blood-dimmed tide is loosed, and everywhere
    The ceremony of innocence is drowned;
    The best lack all conviction, while the worst
    Are full of passionate intensity.

  8. Mega says:

    I spoke to a contact “At the office”……it seems Europe was sell T bills.
    France is just the latest to do this……& my word, France gets chased out of Niger (source of Atomic fuel)…….so France will have to buy “yellow cake” from Oz or Canada…….i wonder what they want for payment?

  9. Mega says:

    Gold $2005……………..just think how much it will go if the middle east goes full war…….pure Mad Max world

  10. Mega says:

    I think we gone as high as $2050 in the past……………..i think we blow though that soon

    1. Bill Terrell says:

      Aye. Another thing is it’s multifactorial. The context is already skittishness about the state of Treasury finances. Normally gold and Treasuries tend to correlate … both are quintessential safety refuges. But they’ve been going their separate ways – Treasuries down, gold up – for a few weeks now. With Treasury bleeding red ink at this rate, and seemingly little interest in Washington in even slowing it down, it’s being increasingly treated like risky credit. And these deficits are happening at a time of full employment … what happens when recession materializes?

      Then layer on top of that not one but two full scale wars and a tone-deaf TSec actually coming out and touting our ability to finance both at a time like this, and gold is kinda out there all by itself as the king of safety.

  11. Mega says:

    Not sure what the “West” can do……………frankly they tapped out. Just found out FORD have the worst customer bad debt problem in 30 years!!!
    Hopefully Tesla will get crushed, here in the UK NO ONE wants to insure his cars…….i know in the US Elon will offer to…………but if you speed in his car he knows & will dump you.

    A Bloodbath is coming & its almost on us now.


    1. Bill Terrell says:

      Tapped out but not yet realizing it. At this point, almost anything can happen, but one of the possibilities is this thing spins out of control and the US faces a crisis that makes last year’s UK kerfuffle look like a spring breeze.

      It’s starting to look like a big game of chicken between monetary and fiscal policy. The Fed keeps the pressure on while politicians keep spending in hope of backing it into a corner where it finances their impulses by firing up the printing press, waving the white flag on inflation and throwing the US dollar and the American public under the bus. That would also please Wall Street and Silicon Valley, the other prime easy money constituencies. With all this arrayed against the inflation fight, it would be disappointing but not surprising.

      Bloodbath wouldn’t be too strong a word.

      Some good market perspective from Jim Grant:

  12. sadsack says:

    Perhaps off-topic, but I started a thread on another forum in your honor, Mega – “Gold getting KILLED!”