- A “twist steepener” in the bond market is widening the gap between short- and long-term U.S. Treasury yields. This dynamic is dragging the dollar lower, exacerbated by President Trump’s political interference in the Fed, weak growth, and inflation risks, according to analysts at Convera. The dollar is down 9.69% on the DXY index year to date.
The S&P 500 hit a new record above 6,500 for the first time ever yesterday, and futures contracts on the index were down only a little before markets opened this morning in New York, indicating that investors are relatively sanguine about equity valuations being as high as they were right before the dotcom crash of 1999–2002.
Over in the bond and currency markets it’s a different picture. The yield on two-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 Treasury 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 spread between the yields of the two-year bond and the 30-year bond was at its widest in three years earlier this week, according to Jim Reid and his team at Deutsche Bank. “That left the 2s30s curve at its steepest level since January 2022,” they said.
The two-year yield has since gone up a bit, but the yield curve between the two-year and the 30-year continues to climb:
So the debate is, will the curve continue to steepen because two-year yields decline as 30-year yields stay high (a “twist steepener”)? Or because both two-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 labor 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:
- S&P 500 futures were down 0.33% this morning premarket, after the index closed up 0.24% yesterday, another record high.
- STOXX Europe 600 was down 0.57% in early trading.
- The U.K.’s FTSE 100 declined 0.24% in early trading.
- Japan’s Nikkei 225 was up 0.73%.
- China’s CSI 300 was up 1.77%.
- The South Korea KOSPI was up 0.29%.
- India’s Nifty 50 was down 0.3% before the end of the session.
- Bitcoin rose to $113.2K.
