Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the 10Y-2Y Spread Steepening Changes Risk
Transcript
- Lucas: So the yield curve has been steepening — and I know we talk about this a lot, but I want to focus on a specific number this morning. As of yesterday, the spread between the 10-year and the 2-year Treasury hit 40 basis points. Luna: That's up from 36 just a week ago. And last month it was around 30, if I remember right. Lucas: Exactly. So the curve is definitely getting steeper. And a lot of people hear 'steepening' and think, great, the inversion is over, everything's fine. But the story is more nuanced than that. The 10-year is now at 4.62 percent, the 2-year at 4.26. That's a 40-basis-point gap — the widest we've seen in months. Luna: And the noise around this is coming right as Fed Chair Kevin Warsh is testifying on Capitol Hill, promising a 'regime change' on inflation. That's going to move rates. Lucas: If our money conversations have helped you think about a decision differently, consider supporting the show. A couple of dollars a month genuinely keeps these episodes coming — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. And we keep it ad-free that way. Lucas: So back to the curve. The big question is: what kind of steepening is this? Is it a 'good' steepener, where long-term rates are rising because growth is picking up? Or a 'bad' steepener, where short-term rates are falling because the Fed is cutting? Luna: Right now it looks like more of the first type. Long rates are leading the move — the 30-year is at 5.1 percent, up from 5.06 a week ago. That suggests bond traders are pricing in stronger growth and maybe more inflation risk. Lucas: That's the bullish interpretation. And you can see it in equities — the S&P 500 is at 7,544, up about 0.8 percent over the past five days. The VIX is down to 16.50. So broad market sentiment is okay. But underneath, there are some interesting rotations happening. Luna: Give me an example — what's rotating? Lucas: Regional banks. They tend to benefit from a steepening curve because they borrow short and lend long. So their net interest margins expand. You've seen some of the larger regionals outperform in recent weeks. Meanwhile, the tech-heavy Nasdaq is also up — 26,107 — but the Russell 2000, which is more domestic and rate-sensitive, is basically flat at 2,965. Luna: So small caps aren't buying the steepening story yet. That's a warning sign. Lucas: It could be. If the steepening were purely good news for growth, you'd expect small caps to lead, because they're more tied to the domestic economy. But they're not. They've been stagnant for weeks. And the VIX at 16.50 is low, but the VVIX — the volatility of volatility — is at 93.5, up 2.4 percent. That tells me options traders are hedging for something. Luna: So even though the headline curve looks healthier, the internals are cautious. What about the bond math? A 40-basis-point spread is still very flat by historical standards. Lucas: Right. In the 1990s, a normal curve was 150 to 200 basis points. So 40 is still skinnier than average. It's just that we're coming from an inversion, so the move feels big. But the real question is whether this steepening has legs. And that depends on Warsh. Luna: The headlines yesterday were all about his 'regime change' comment. He basically said the Fed is done with the old framework and is going to be more aggressive on inflation, even if it means slower growth. Lucas: If the market believes that, long-term inflation expectations could come down, which would actually flatten the curve again — because long-term yields would fall. But if the market thinks Warsh is all talk and inflation stays sticky, then long yields will keep rising, and the curve steepens further. Luna: And that's the tug of war right now. Which side is winning? Lucas: Hard to say. The 10-year has moved about 6 basis points in a week. That's not a huge move. But the 30-year is above 5.1 percent for the first time since late 2023. That's psychologically important. A lot of mortgage and corporate borrowing is tied to the long end. Luna: And for equity investors, what does a 30-year at 5.1 percent mean? Lucas: It raises the discount rate on future cash flows. So high-duration assets — like unprofitable tech, growth stocks, even some real estate — get hit harder. Value stocks with strong current cash flows tend to hold up better. That's part of why you've seen energy and financials do okay recently. Luna: But the S&P is still hitting new highs. So the market is looking through the bond move. Maybe it's pricing in a soft landing. Lucas: Maybe. But look at the composition. The top 10 stocks in the S&P 500 now account for something like 35 percent of the index. If those few names are driving the index higher while the rest of the market is flat, that's not broad-based strength. That's concentration risk. Luna: So the steepening is real, but the equity reaction is uneven. What's your concrete takeaway for someone listening today? Lucas: I'd say watch the Russell 2000. If it starts to break out above 3,000, that's a signal that the steepening is being embraced as pro-growth. If it stays flat or rolls over, the curve move might be more about inflation fears than growth optimism. And either way, keep an eye on the 30-year — that bond is the one that really drives long-term borrowing costs. Luna: So the curve is telling us something, but we need to listen to the whole band, not just the lead instrument. Lucas: Exactly. And that's what we'll keep tracking this week as earnings season ramps up and more Fed speakers hit the wires.