What is a bear steepener and why it matters? | Forexlive

TYPES OF YIELD CURVE STEEPENING

The yield
curve is regarded as the best leading indicator of a recession. In fact, when
short term rates are above the long term rates, it signals that the market
expects a slowdown in the economy and eventually the Fed cutting interest rates.

Since the
markets anticipate rate cuts well in advance of the actual central bank move,
the yield curve reaches the maximum point of the inversion well before the economic
downturn and starts to un-invert and steepen just prior to and during the
recession.

The nature
of the yield curve steepening can give different signals though. Generally, recessions
are preceded by a “bull steepening” which is when short term rates fall faster
than long term rates. It’s called “bull” because bond prices rise. That generally
happens when the Fed slashes interest rates to combat a recession.

On the
other hand, we have the “bear steepening”, which is when long term rates rise
faster than short term rates. It’s called “bear” because bond prices fall.
Historically, a bear steepener is not followed by recessions within the next 12
months.

CAUSES OF A BEAR STEEPENER

The causes
for a bear steepener can be many like:

• Growth
  expectations.
• Persistent
  inflationary threats.
• High Supply.
• Low Demand.

WHAT TRIGGERED THE BEAR STEEPENING

This week
the bear steepener was triggered by the better than expected US Consumer Confidence
report which basically set aside fears around the labour market. In fact, this
report is more weighted towards the labour market and after three consecutive negative
reports and a disappointing NFP report, the data showed a rebound.

The long
term yields skyrocketed and accelerated as the bond auctions disappointed. The short
term yields though didn’t move much. Since the catalyst for this action was the
consumer confidence report, it looks like the cause for the bear steepener is
growth expectations and higher rates for longer.

Historically,
risk assets perform well with bear steepeners and even a bit better than
average, which shouldn’t be surprising if the market expects positive growth.
So, the recent risk-off looks more like month-end shenanigans rather than something
fundamental.