Is the Bond Market Wrong?

Everyone now says the bond market has it wrong, deficits now matter, tariffs are inflationary, Fed hawks, rates have to rise, rates are rising. Except no, they're not. What's happening on the curve and a lot of curves is nothing more than steepening. But steepening is oftentimes a confusing process. In fact, it goes all the way back to the initial inversions themselves. The process of going from curve inversion to uninversion is not always intuitive, especially since there's so much everyone gets wrong about those initial inversions. And let's face it, all these mainstream experts shouting about inflation that isn't happening or Fed hawks that disappear, they don't help since they don't understand interest rates to begin with. The mainstream is filled with mysticism and superstitions, not legit small E economics. To begin with, curve inversions are thoroughly proving to have been right 100%. What they forecast for the long run is exactly what we're getting now, especially that we're on the verge of reaching that long run. And so uninversions just fits into that process. Deficits, busted auctions, tariff inflation, Fed hawks, no, none of it, steepening. And it's right on schedule too. So why are long-term rates seemingly going higher? Well, first of all, they aren't. They are significantly less today than where they were at the start of this year. Now the media hypes up every rise in long-term rates to give you the impression that yields are skyrocketing. And if you don't look at the charts, it's easy to lose sight of where things really stand. And since the yield curve was inverted and heavily inverted for quite a long time, it was going to steepen out at some point. Curves are always upward sloping and it takes something big to distort them so badly that we've seen inversions and then hold them there for a long period of time. But over time, they're going to un-invert. And that process of un-inverting is badly misunderstood largely because central bankers and economists have no idea what to make of them or to make of interest rates. Interest rates completely baffle all of them. Thus, what Alan Greenspan said in 2005 was a conundrum, which central bankers anyway have yet to solve because they don't like the answer. To really clarify things, let's go back to 2023. If you remember late in 2023, there was this argument about bull versus bear steepening, largely because people were convinced about inflation and deficits and all of that stuff. And since the curve was inverted and heavily inverted to that point, at some point, the curve had to un-invert and the question was in which direction. It's been pretty much forgotten these days because the bulls won decisively. The bears still show up from time to time and they go on and on about more inflation, which doesn't exist or bond vigilantism, which never existed. They appear only because they don't understand steepening. But in 2023, the government had gone insane issuing debt. There's no argument about that. But everyone was also convinced that inflation was about to reignite. All those charts that people had showing the supposed similarities between 2023 and 1973 or 1977 or what a bunch of other ones did. The Fed did its part too by saying higher for longer over and over and over again. As far as the mainstream was concerned, the curve had to un-invert in the bear steepening fashion. And bear steepening quite simply is where long-term rates, which were below short-term rates, that's the inversion, the long-term rates reverse and go well above short-term rates. Not only do they equalize with short-term rates, they soar well ahead of them. And that's what most people thought was the most likely outcome for the reasons that I just cited. Debt, inflation, and the Fed. There was never more than a trivial possibility for those things because of the inversion itself and what it represented. All inversion really means is that the market expects interest rates in general to go lower over time, period, full stop. That's all it actually says. So those who are arguing for bear steepening were basically saying the market was wrong because inversions and rates going lower were completely opposite the mainstream view on debt, inflation, and the Fed. See, that's all Alan Greenspan's conundrum in 2005 was really about. He didn't like the market's take on conditions and its forecast for the future since the market was forecasting recession and eventually deflation that Alan Greenspan thought was impossible. That was his conundrum. And he was wrong back then, and so were the bear steepeners in 2023 for basically the same reasons. In other words, the market was right, which we now see more clearly here in 2025. Therefore, the bull steepening case is what we now have on the agenda. Bull steepening, and I hate this term because the word bull is in there and bull makes it sound positive, and it's only positive for those who are holding safe and liquid instruments like US Treasuries. But bull steepening is a negative case where interest rates overall come down quite the opposite of bear steepening, but it's not that they come down uniformly. Bull steepening is where interest rates go lower, consistent with the inversion, but in bull steepening, not all rates go lower at the same time in the same way, nor the same amount. It's a more complicated process than it at first appears. A lot of people think there can't be bull steepening since there was no recession. Those who take the view that the market has been and still is wrong, try to make it into a recession question. Since there hasn't been an officially declared recession by the NBER, yield curve inversion must have it wrong, so everything else which comes afterward must also be wrong. Therefore, they also claim it's only a matter of time before the bear steepening shows up and long-term rates skyrocket like they were supposed to back in 2023. Their victory has only been delayed. But curve inversion isn't entirely or even much about recession. That's sort of an accident of history. As I stated before, inversions only apply the market expects rates to go lower in the future. That's all they say. Inversions are simply the cash market equivalent of interest rate swap spreads. Both of them, all they indicate is a strong signal for market expectations, big time, big market expectations from the biggest, most sophisticated and far reaching markets. And historically, rates have gone down when the economy heads into recession because of higher demand for safety and liquidity as well as lower growth, especially in the short run. So inversions typically come with recessions, but that doesn't necessarily mean inversion is entirely about NBER declared recessions. It's about rates going down. That's what inversions were saying. That's what swap spreads becoming more negative have been saying. And what have we seen more and more since the middle of especially last year? Not only are rates going down, even central bank policy rates are coming down too. Higher for longer is a distant memory. So are the inflation risks that everyone was so sure about in 2023, as well as this time last year too, if you remember the sticky inflation crisis, which kept the Fed from cutting while all the other central banks did, at least in the first half of 2024. In other words, as far as interest rates are concerned, the market was absolutely correct about their direction. Back in late 2023, the vast majority said central bank rates were at least going to stay where they were and never go significantly lower. And if they did go lower, it was supposed to be a gradual process, which took years. Instead, starting in October, 2023, market rates went down. And by March of 2024, central banks began to fall with Switzerland and Mexico, and they've kept going by and large and a lot more ever since then. The global race to the bottom is not only back on, it's a lot farther along than most people realize, at least those people who don't watch Yerudala University or keep up with everything with Yerudala University's deep dive analysis or our daily briefing. Even when the Fed finally started to cut, what did it do? It started out with a 50 basis point drop. And so what the markets are saying is that there's still more to come, which is exactly what we're getting here in 2025. So the recession question is entirely one about interpretation, meaning why are rates going lower? They don't necessarily need a recession to do that. What the markets have really said first with inversion and now with un-inversion and bull steepening is, number one, there was no economic recovery from the pandemic, the lockdowns and the supply shock, all of it. It was a price illusion, a phase shift in prices that ended up impoverishing almost the entire planet. Realizing that critical difference, straight away you can see why the bond market has been so pessimistic ever since 2022 and really 2021. Number two, since there was no recovery and it was only ever a price illusion created by the supply shock, there was no follow-up inflation nor any risk of it somehow getting restarted. It doesn't matter what central bankers have been saying or economists, which are the same thing, or all the talking heads on TV and across social media. Just look at the CPI. It clearly defines the supply shock as a phase shift in prices, one that ended in the summer of 2022, full stop. And it was the summer of 2022 when we see the markets begin to go haywire. In fact, they went haywire before the summer, the first inversion showing up in March and April of 2022. In fact, in Eurodollar futures, they showed up in December of 2021. And you also see this all over the world. It isn't just in the United States. And when you account for fake shelter prices in the CPI, you can see what I mean even more clearly, no subsequent inflation. So disinflation since 2022 has only meant the phase shift was over, exactly how the markets priced it. What people complain about when they complain about inflation, and rightly so, is simply the combination of number one and number two. The lack of recovery in the economy, therefore the labor market, combined with the supply shock phase shift, which destroyed so much of the world's purchasing power at the same time as destroying the ability of the labor market to get any of it back or get enough of it back. Again, all of that is consistent with the initial curve inversions and eventually interest rates going lower over time after central banks eventually stopped interfering in short-term rates. And this is right where we are today. What remains unknown is exactly how we finish off this transition. The transition itself, that's what the markets were saying, and the transition, we can see it everywhere. We went from government-fueled, artificial high, price illusion, what everyone said was recovery, to forgot how to grow, which is indeed a recession in everything but mainstream recognition. So the forgot-how-to-grow recession was simply the transition from 2021 to the long-run future of a world that was impoverished and lost purchasing power, not to mention millions upon millions of jobs and job opportunities. And that sounds a whole lot like lower interest rates. So does an officially declared MBR recession fit into that transition? It sure could, and there continue to be signs for it all over the place, including layoff indications, especially as jobless claims came in hot yet again today. But realize, in the big picture, that doesn't necessarily matter. The inversions were right about the lack of recovery, the lack of inflation, the aftermath of impoverishment from the phase shift, all of it. Even how central banks were eventually going to have to face up to those with lower policy rates. Again, exactly what we see happening right now. In fact, just yesterday, the World Bank, as I mentioned in yesterday's video, came out and said, we now believe that the 2020s, for as far as global economic growth is concerned, is going to be less than the 2010s. That's exactly what the markets have been pointing, that's what inversions were saying the entire time. There was no recovery, and as bad as the 2010s had been, lower rates signaled the 2020s, we're not gonna do any better, and there was a rising chance given all of these factors, the 2020s were gonna end up somehow being worse. That's what inversions were saying, lower interest rates, going lower through time, and staying there. And all of the pieces forward are coming together in increasingly visible fashion, up to and including central bank policy cuts, and more aggressive policy cuts, and deeper policy cuts. And that simply means transitioning in the marketplace from inversion to steepening, and especially bull steepening. And in the bull steepening case, focus transitions from the back end to the front end. So as I've said more recently, we have to watch the twos, not necessarily the tens, because there is more downward bias at the twos and in the front end than at the tens. And this is perfectly normal, it's entirely consistent with bull steepening. Why? For one, long-term rates already had their day, they already did their big move, they were the focus during the initial inversion. They used up some of that profit potential, or the already expressed lower growth and inflation expectations at the start, at the front, at the inversion. From here, it's short-term rates that will move lower because they're joining later in the process and have a lot farther to go, especially having to correct from the massive central bank interference. And short-term rates also don't have as long of a horizon when faced with potentially negative economic circumstances or monetary circumstances too, so everyone piles into the short-term part of the curve, the safety to get through the short run and ride out the worst parts of this cycle. And then central banks do exactly the same thing, panicked by the response, thereby chasing weakness they can't fix and bringing down short-term policy rates sharply as well. Again, this is everything that we see happening right now, including the short-term bias where rates are moving much lower, whereas long-term rates seem to be relatively more stable. The curve steepens with that bias at the front end. Now, this doesn't mean that long-term rates won't be going lower. In fact, they actually are going lower, but it seems like the opposite's the case. Number one, the mainstream media paints that picture, but also with short-term rates that are biased much lower, it seems like long-term rates are at least lagging behind because they actually are. They are going to lag short-term rates and not follow nearly as closely or go nearly as far. And it's that parent discrepancy which has revived the bare arguments about too much debt, too much tariff inflation, and too much Fed incompetence. We can see this when we look back at past cycles. You get exactly the same uninversion process in the bull steepening pattern and procedure. Short-term rates go a lot farther than long-term rates do. And it's sometimes long-term rates don't appear to go anywhere. And then you get toward the end of the cycle in the process, long-term rates actually start rising again even before the recession, if that's what we have, even before that recession finishes, the curve really begins to steepen out as long-term rates rise before it finishes up. Now, we aren't that far yet, and we do still see a downward bias to long-term yields worldwide, contrary to the crap that you hear in the mainstream about treasury and debt issuance fears. Long-term rates are not skyrocketing outside of maybe Japan, and that's not for fundamental reasons, it's because of the Bank of Japan, again, more central bank interference. In fact, the 10-year US treasury today is about 50 basis points lower than where it had been around the middle of January. So December and January, rates were rising, everybody's shouting about the same things. Rates went a lot lower in between, and while they perked up a little bit, nothing ever goes in a straight line, there are always short-run fluctuations. You still see, over the 2025 so far, a bias lower in long-term rates, but more so the stability and steadiness and the bias in the short-term part of the yield curve. Because bull steepening, as I said, short-term rates go down a lot farther, they tend to get there quicker, and long-term rates, having already used up a lot of their big move, a lot of their growth and inflation expectations coming down, they lag behind, and the lagging behind is where all of this confusion seems to be coming from. Economists and central bankers, same thing, have given the public this impression that interest rates are basically uniform, they're monolithic. If the Fed does one thing, then all interest rates do the same thing and just fall in line. In fact, that's what Alan Greenspan was saying in his conundrum. He said that the yield curve is like a series of one-year forwards. In other words, it all works in concert at once. Nothing could be farther from the truth. As I said, economists and central bankers, they don't understand interest rates, they get all of this stuff wrong. So the public was left with the wrong impressions. So what we have is nothing more than inversion leading to un-inversion in the bull steepening case, and in the bull steepening case, it doesn't bull steepen all at the same time, all in the same way, all at once. There are differences that we need to be aware of, and in those differences come all of these other arguments about tariff inflation, or deficits, or the Federal Reserve, and a whole bunch otherwise. But just to review here, once a rate curve inverts, all that says is the market believes that interest rates will go lower over time, period. It isn't even a question of why interest rates go lower, that's easy, low growth and inflation expectations. But most often, we get hung up on how we go from before to that future when rates are low and then stay there. That's what everybody gets into this recession stuff. All lower interest rates really mean is low growth, low inflation. It doesn't say how we get to low growth or how we get to low inflation. The problem is, this doesn't agree with most people's views on matters like inflation, government deficits, or their total allegiance to central banks. The bond market very often, and almost always, disagrees with the Fed, and it has for decades, thus Greenspan's conundrum, which wasn't really new back then either. So what you hear then is everyone is told to dismiss these market signals, or they say the markets are wrong, simply because they don't like what those signals say about these commonly held views, and a whole lot more beside. After inverted curves got the direction of interest rates in the long run correct, now the curve has to un-invert in a more complicated than it seems bull steepening process. And that too has been unfolding, and it goes all the way back to last September. But what that means is that interest rates overall and across the world are gonna continue falling. They're likely to stay down once they get there, and the rest of us will continue arguing and debating about how we get to that point. And while NBER kind of recession could be in this mix, recession isn't really the matter here. It isn't really the issue, because inversion and then bull steepening already told us what the future is like, and there's no inflation in it, and that's the bad news. The more visible and recognizable inflation stuff, we're seeing that start to develop in places around the world like the UK, as well as others, and went over that in the video link below. As always, thank you very much for joining me. Huge thank you, your university members and subscribers, and until next time, take care.