Over in the bond and currency markets it’s a different picture. The yield on 2-year treasuries was sitting at 3.635% this morning and it has been declining all year. The yield on 30-year treasuries, however, was at 4.904% this morning and it has been rising all year.
The curve that plots the gap between them over time is rising—and analysts at Convera, an FX payments platform, earlier this week started worrying that this looks like a “twist steepener” or a “bear steepener” in the bond market.
A “bear steepener” implies a bear market for the prices of bonds. (Bond prices move in the opposite direction of their yields, so if treasuries’ yields are going up it’s because their prices are going down). The “bear” aspect comes from the notion that if the yields on both short-term bonds and long-term bonds are rising, but the long-term yields are rising faster, increasing the spread between them, then that implies a broad loss of confidence in what investors usually regard as a low-risk asset.
This is bad news for the dollar, according to Convera’s George Vessey. The dollar’s value is tied to the value of short-term interest rates set by the U.S. Federal Reserve. If those rates go down, then the dollar sinks in correlation. The dollar has lost 9.69% of its value on the DXY foreign currency index, year-to-date.
The 2-year yield has since gone up a bit, but the yield curve between the 2-year and the 30-year continues to climb:
So the debate is, will the curve continue to steepen because 2-year yields decline as 30-year yields stay high (a “twist steepener”)? Or because both 2-year and 30-year yields go up, with the latter growing faster (a “bear steepener”)?
The terms overlap, Vessey told Fortune. “I would say the former (twist) is more at play right now. But both refer to the widening gap between short and long-dated yields.”
“The yield curve is twist-steepening: short-end yields are falling on rate cut expectations [from the Fed], while long-end yields rise amid fiscal concerns and inflation risk. That’s rarely dollar-supportive, as it signals weaker growth and eroding policy credibility,” Vessey told clients in a note this morning.
Why is this happening? The loss of “policy credibility” around U.S. dollar-denominated assets has a real price, Vessey argues.
“Political interference is compounding the issue, with Trump’s continued testing of the Fed’s independence undermining investor confidence in the central bank’s autonomy,” he said. “At the core is a rare convergence of structural shocks. Tariffs are dampening consumer and corporate demand, dragging on GDP. Simultaneously, immigration constraints are tightening labour supply, curbing potential output and stoking wage pressures. These twin shocks slow growth without a clear inflation offset.”
Here’s a snapshot of the markets prior to the opening bell in New York:
