of this article described the burgeoning bull steepening yield curve environment and what it implies about economic growth and Fed policy. It also discussed the three other predominant types of yield curve shifts and what they suggest for the economy and Fed policy.
curve. Additionally, shaded in gray are periods we deem persistent bull steepening. We defined the bull steepening periods by the curve’s movement and the trend’s consistency. To qualify, the yield curve had to be increasing, with 2-year and 10-year yields moving lower for 20 weeks or longer. Furthermore, we required at least 80% of the weeks to be in the bullish steepening trend.
Furthermore, and of importance, the current steepening is occurring from a yield curve that has been inverted for two years. Inverted means the yield on the 10-year is less than the 2-year. An inversion reduces the incentives for banks to lend, thus further increasing the odds of economic weakness. The graph below shows that even though we have a firmer warning, a recession can take more than a year to enter.By definition, all Treasury bonds provide positive returns in a bull steepening. While 2-year yields will fall more than 10-year yields, the duration on 10-year notes is much greater. Thus, from a total return perspective, longer-duration bonds often provide better returns than shorter-duration bonds.
For instance, gold is up about 10% from the start date. If this is a persistent bull steepening cycle and gold ultimately matches the average 13% return over the prior five periods, it has limited upside. However, its average drawdown during the previous periods is about 6%.
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