Bear steepening in US Treasury yield curve raises economic concerns

As the 2024 U.S. election approaches, the U.S. Treasury yield curve is experiencing a significant “bear steepening,” sparking concerns over potential economic challenges in the coming years.

This shift, marked by rising yields on long-term bonds, reflects market anxiety as investors anticipate both election outcomes and the Federal Open Market Committee (FOMC) meeting shortly afterward.

The yield curve, which usually slopes upward, has been inverted for over two years—signaling a recessionary warning as short-term yields surpassed long-term yields.

Recently, this trend reversed, with the steepening of the curve most pronounced in 10-year and 30-year bonds, rising 2.41% and 2.33%, respectively.

Bear steepening, a situation where long-term yields increase more than short-term ones, often suggests market expectations of heightened inflation and potentially increased government borrowing, indicating possible economic challenges.

Historically, an inverted yield curve has predicted major recessions, including the Great Depression.

The current bear steepening could signal a shift from recessionary warnings to potential economic downturn.

The increase in long-term yields may suggest that market participants expect further inflation and, potentially, a pivot by the Federal Reserve towards rate cuts if economic conditions worsen.

Investors’ cautious approach is evident in the rise of safe-haven investments, with billions moving into bonds, gold, and Bitcoin exchange-traded funds (ETFs).

This trend highlights a growing preference for assets perceived as secure during times of economic uncertainty.

The steepening of the yield curve holds wider implications for American consumers and businesses.

Rising long-term yields can lead to higher borrowing costs across the economy, affecting mortgage rates, car loans, and corporate financing.

For consumers, this may result in higher monthly payments or more difficulty obtaining loans, while businesses may face constrained expansion efforts due to elevated financing costs.

The bear steepening also points to market expectations for expansionary fiscal policy post-election, regardless of the victor.

A Trump administration may favor increased spending or tax cuts, while a Harris administration could continue with regulatory enforcement.

Both scenarios might perpetuate inflationary pressures, which, if not balanced by economic growth, could intensify economic strain.