The Rare Phenomenon of Bear Steepening in Bond Markets

The yield curve is displaying a rare and dangerous pattern which often threatens financial stability.
All you need to know about the Bear Steepening.
Thread.
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There is a rare and powerful trend occurring in bond markets: the yield curve is bear steepening.
History shows that if left unchecked, it can cause serious damage to equity markets and the economy.

What's a bear steepening?
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Bear steepening happens when interest rates move higher but it’s long-dated yields that take the lead, hence shifting the entire curve higher but also steeper.
Here is a visual interpretation:
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Markets have recently priced out a lot of Fed cuts, and so front-end yields have sold off.
But investors aren't assuming that less Fed accomodation will lead to weaker growth and inflation down the road.
To the opposite: they are assuming the economy can handle it.
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The key feature of Bear Steepenings is that 30-year yields rise rapidly - this matters
A 10 bps rise in 30y yields is about 10x more damaging than the same increase in 2y yields for investors - this is because long-dated fixed bonds are way more sensitive to changes in rates
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All business models which make large use of long-dated instruments and leverage are vulnerable if their risk management wasn’t done properly: pension funds, insurance companies, shadow banking, real estate, and more.
But bear steepenings aren't a problem per se, unless...
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...they happen while nominal growth is weak.
Today nominal growth runs at 4%+ and it's expected to remain robust: that's why the bear steepening is occurring but equity markets aren't negatively affected yet.
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It's important to keep watching this rare and potentially dangerous trend in bond markets: if the yield curve continues to Bear Steepen and nominal growth slows down, that's when risk assets suffer the most.
This table shows the impact of yield curve and growth regimes:
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