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.


The causes for a bear steepener can be many like:

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


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.