{"id":47466,"date":"2023-08-12T00:58:05","date_gmt":"2023-08-12T04:58:05","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-stock-markets-next-big-worry-a-bond-market-bear-steepener\/"},"modified":"2023-08-12T00:58:07","modified_gmt":"2023-08-12T04:58:07","slug":"the-stock-markets-next-big-worry-a-bond-market-bear-steepener","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=47466","title":{"rendered":"The Stock Markets Next Big Worry: A Bond Market \u2018Bear Steepener\u2019"},"content":{"rendered":"
\n
<\/p>\n

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<\/p>\n<\/figure><\/div>\n

The bond market is trying to send investors a message. A lot hinges on how they interpret it.<\/p>\n

In recent weeks, the yield on the 10-year Treasury has risen to 4.15%, 0.28 percentage point more than the two-year Treasury yield. That could mean one of two things: better economic growth ahead\u2014or a big problem.<\/p>\n

\n

At first glance, the message in the bond moves makes sense. The two-year yield is more sensitive to changes in monetary policy, and the Federal Reserve isn\u2019t expected to be making any major changes in its interest-rate policy. That was confirmed following this past week\u2019s benign consumer inflation print, which did nothing to change the disinflation narrative. The chance of a September interest-rate hike sits at 11%. The 10-year yield, which is more responsive to growth expectations, has been rising as recession concerns have eased. <\/p>\n

But there\u2019s a complicating factor: The move might not be driven by expectations for more growth. Earlier this month, the Treasury Department increased the estimated amount of debt it would have to issue during the second half of the year. Since then, investors have been more reluctant to bid for longer-dated notes and bonds at auction, driving prices down and yields higher. <\/p>\n

Don\u2019t think the stock market hasn\u2019t noticed. This past Thursday, the
\n S&P 500 index
\n looked set for a big gain after July\u2019s consumer-price-index report\u2014until the completion of an auction of 30-year bonds. The auction results were disappointing enough to send yields higher and cause stocks to give back their gains, says Barry Knapp, director of research at Ironsides Macroeconomics. If that continues, it could mean more volatility for stocks and bonds. <\/p>\n

Here\u2019s the issue: Bond traders never look at the yields on individual maturities, but at multiple yields across different maturities\u2014collectively known as the yield curve. They place bets on whether the curve will \u201cflatten,\u201d meaning longer-term yields will decline faster than short-term ones, or \u201csteepen,\u201d when long-term rates rise faster than short-term ones. When the steepening or flattening happens with bond prices rising and yields falling, it\u2019s called a bull, and when it happens the opposite way, it\u2019s called a bear. <\/p>\n

With the 10-year yield rising and the two-year remaining roughly in place, as it is now, it looks like the Treasury market is in a \u201cbear steepener.\u201d That doesn\u2019t happen very often. The bond market spends about a third of the time in a bear flattener, a third of the time in a bull flattener, and a quarter of the time in a bull steepener, according to Ned Davis Research data. A bear steepener happens less than 10% of time. \u201cA bear steepener is a relatively rare, unstable condition, particularly for late in a tightening cycle,\u201d writes Joseph Kalish, chief global macro strategist at Ned Davis Research. <\/p>\n

If the steepening continues, it would be sending a strange message\u2014one that pushes back against the current narrative about muted growth, tame inflation, and a Fed that is finished raising rates. Instead, it would seem to imply growth is accelerating and that a data-dependent Fed will continue tightening. <\/p>\n

\u201cThe macro message is that the economy is strengthening, and the Fed is expected to hike,\u201d writes Kalish\u2019s colleague Ed Clissold, Ned Davis Research\u2019s chief U.S. strategist. \u201cPut another way, the economy is getting the all-clear message, but the Fed has not overtightened.\u201d <\/p>\n

History suggests that\u2019s good for stocks. Clissold notes that the S&P 500 has gained 9.5% a year during bear steepeners, only slightly worse than during bear and bull flatteners. Stocks averaged a 1.9% rise during a bull steepener, when the Fed was cutting rates, likely because of a recession.<\/p>\n

Dennis DeBusschere, founder of 22V Research, credits the bear steepening to this year\u2019s rapid disinflation, which suggests better growth prospects ahead. \u201c[The] burden has shifted and evidence that…growth is NOT the driver of the curve is needed before we would take a more defensive stance,\u201d he writes. <\/p>\n

Stocks that benefit from a steepening yield curve include
\n Generac Holdings
\n (ticker: GNRC),
\n Alphabet
\n (GOOGL),
\n PoolCorp.<\/span>
\n (POOL), and
\n Target
\n (TGT), he notes.<\/p>\n

But what if the bear steepening isn\u2019t driven by growth? Ironsides\u2019 Knapp sees signs that the move in longer-term yields is being driven by the massive supply of bonds coming from the U.S. government. Bear steepeners based on too much supply are very rare, and it won\u2019t be taken well if that\u2019s the case now, he says. He estimates that a continued steepening could cause the stock market to fall 5% to 7%. \u201c[The] bear steepener was a warning shot,\u201d he explains. <\/p>\n

The good news: It could finally force the Fed to end this rate-hiking cycle once and for all and provide a buying opportunity.<\/p>\n

Write to <\/strong>Ben Levisohn at Ben.Levisohn@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The bond market is trying to send investors a message. A lot hinges on how they interpret it. In recent weeks, the yield on the 10-year Treasury has risen to 4.15%, 0.28 percentage point more than the two-year Treasury yield. That could mean one of two things: better economic growth ahead\u2014or a big problem. At […]<\/p>\n","protected":false},"author":1,"featured_media":47467,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-47466","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nThe Stock Markets Next Big Worry: A Bond Market \u2018Bear Steepener\u2019 | iFintechWorld<\/title>\n<meta name=\"description\" content=\"The bond market is trying to send investors a message. A lot hinges on how they interpret it. 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