Insights 
VT 
The recent bear steepening suggests a decreased likelihood of a US recession soon. This change can impact how businesses hire, how consumers spend, and influence the broader economy.
The S&P 500 is back in positive territory for 2025, which implies reduced chances of a market-driven slowdown in economic activity. This shift indicates the ongoing relevance of the Trump administration’s focus on equity market performance as a measure of success.
The Concept Of Bear Steepening
The concept of a “bear steepening” involves long-term yields increasing faster than short-term yields. This steepening of the yield curve often reflects expectations of stronger economic growth or higher inflation.
What we’ve seen in markets recently is a marked change. A bear steepening, by definition, signals that investors are demanding more yield to hold longer-dated debt. In plain terms, they think growth prospects or inflation risks may be on the rise. That may sound counterintuitive given how cautious sentiment had been earlier in the year. Nevertheless, the upward move in long-dated yields suggests investors are rethinking how durable the expansion is—perhaps also questioning how soon the Federal Reserve could start to change its tone.
With equity indices back in the green for 2025, it’s apparent that broader fears of a dramatic slowdown have started to take a back seat. It’s not just the level of gains that matters here—it’s the timing. Recovering earlier than expected may feed into higher corporate confidence. This kind of movement typically filters through to lending standards, credit spreads, and ultimately how risky assets are priced in the months that follow.
Upcoming Inflation Data And Rate Paths
What matters more now is what the next few weeks bring in terms of inflation data and wage pressures. These will shape upcoming decisions on rate paths. The acceleration in long-end yields might be read as the market pre-empting firmer inflation prints or stronger payroll data. This could lead us to adjust how we deal with rate-sensitive positions.
Powell has not given strong clues about a near-term pivot, and recent wording has leaned slightly more hawkish. That alone helps explain why volatility has ticked up. If we take a step back, this all points to a far more two-sided market. It’s becoming less about binary recession or not, and more about the pace of growth and how persistent price pressures prove to be.
We’ve had to reassess how various instruments might behave in an environment where long-term rates rise but the front end stays more grounded. It changes implied volatilities, reshapes relative value, and forces a closer look at curve trades that had performed well in flatter regimes. There’s more emphasis now on managing risk across tenors, rather than taking outright direction.
As investors start to shed old positioning based on recession themes, bid-offer has widened modestly across some contracts. That’s not unusual when narratives flip quickly. Importantly, it limits short-term liquidity in rates and credit derivatives, which could affect hedging efficiency. It’s worth being selective here—identifying where the old pricing models no longer apply and recalibrating accordingly.
Yellen’s comments earlier last month reinforced the Treasury’s comfort with rising long-end yields so long as they reflect real growth expectations rather than disorderly markets. That provides some degree of policy clarity, which is helpful. Nonetheless, we need to stay alert to any surprise communication shifts, especially from mid-tier Fed speakers.
For now, implied correlations have broken down in some sectors, meaning standard hedges aren’t working in quite the same way. That applies primarily in rate-vol and FX-linked exposures and may require us to take a more bespoke approach.
Some are starting to rebuild steeper curve positions that had been unprofitable for much of the prior year. However, entry timing remains everything. We might want to be tactical rather than thematic here—avoiding structure-heavy trades that over-rely on backward-looking vol assumptions.
The focus in the nearer term is whether this yield curve move becomes self-reinforcing. If investors believe stronger growth is ahead, they’ll demand even more term premium. That feeds back into financing costs, and eventually into corporate and sovereign bond issuance strategies. As such, trade entries should factor in both direction and velocity of yield movement.
The wider takeaway is that fixed income pricing is no longer anchored by recession certainty. It’s now more responsive to marginal data. That might sound straightforward, but for those of us allocating capital across durations and geographies, it demands we reassess which part of the curve still provides asymmetry.
Our approach has had to become both more flexible and faster. Static positioning won’t work when one employment report can reset the forward path. We’ve had to rely more on intra-week options and shorter gamma expressions. That seems prudent now, given how rate expectations are swaying more from data than from FOMC nods.
Seeing the positive year-to-date equity return also reinforces this: investors aren’t just moving out of defensive exposures—they’re doing so with higher risk tolerance in mind. That makes sense. A rising equity market alongside a steepening curve can still be consistent with a more difficult macro backdrop. It merely shows the path getting longer, not easier.
