Yield Curve Analysis

Yield Curve Data (Source: FRED)

---

An upward-sloping (STEEPENING) long end that strengthens the case for a “re-acceleration” or “reflation” outlook.

1. Significant Long-End Steepening

The spread between the 2-year (3.47%) and the 10-year (4.08%) is now 61 basis points.

• The Signal: Either a classic “bull steepener” IF the 2-year is falling faster than the 10-year, or a “bear steepener” if the 10-year is rising faster then the 2-year. It indicates that while the market expects the Fed to cut rates in the short term (3-month vs 2-year inversion), it expects higher nominal growth and inflation over the next decade.
• Term Premium: Investors are demanding a higher premium (4.08% vs 3.65% for the 5-year) to lock up their money for 10 years, suggesting they do not see a return to the “zero-rate” era anytime soon.

2. The “U-Shaped” Yield Curve

With the 10-year at 4.08%, the curve is U-shaped.

• Front End (3m – 2y): Inverted (Recession hedge/Rate cut expectations).
• Back End (2y – 10y): Sharply positive (Growth/Inflation expectations).
• The Interpretation: The market is betting on a “Soft Landing” or “No Landing.” It suggests the Fed will successfully lower rates to a “neutral” level (but that appears to be around 3.5% in the market’s eye) without crashing the economy, allowing growth to pick back up in the long run.

3. Corporate Credit vs. Risk-Free Benchmarks

The 10-year Treasury is the “risk-free” benchmark for long-term corporate debt.

• Aaa Spread: The Aaa yield (5.26%) is 118 bp above the 10-year Treasury. This is a very healthy, standard spread for top-tier credit, indicating no signs of stress in the plumbing of the financial system.
• The Hight Yield Option-Adjusted Spread (HY-OAS) is at 295 bp which means that investors are willing to accept a much lower premium to invest in “junk” bonds as the perceived risk of corporate defaults is low.
• Equity Valuation Pressure: A note of caution for equity investors – the 10-year yield crossing the 4.00% threshold often acts as a headwind for stock market valuations (specifically tech/growth stocks), as the “discount rate” for future earnings increases.

Summary