Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the Yield Curve Is Steepening Again
Transcript
- Lucas: So the ten-year Treasury is back at four point six nine percent, and the thirty-year just pushed above five point two two. That's the highest we've seen the long end in months, and it's happening even as the market is pricing in a Fed rate cut. Luna: Wait, that seems backwards. If the Fed is about to cut, why are long-term yields going up? Lucas: That's exactly the question. And it's the steepening curve we talked about back in episode one thirty-five, when the thirty-year first hit five point one seven. But now the move is more pronounced. The two-year is at four point two five, so the spread between two and ten has widened to about forty-six basis points. That's a meaningful steepening from where we were a few months ago. Luna: So the bond market is saying short-term rates are coming down, but long-term rates are going up. What does that tell us about growth? Lucas: It's telling us the market is worried about two things at once. On one hand, the July jobs miss was a big deal. Odds of a Fed hike in September tumbled, and now the market is almost fully pricing in a cut by the end of the year. That's the short end reacting to weaker data. Luna: And the long end reacting to what, exactly? Lucas: A few things. First, there's the supply story. The Treasury is issuing a lot of debt, and investors are demanding a higher premium to hold it. Second, there's the inflation expectation piece. Even with growth slowing, the market isn't convinced inflation is dead. And third, there's the term premium itself. When there's more uncertainty about the path of rates and growth, investors want more compensation for locking up their money for thirty years. Luna: So a steeper curve here isn't the classic 'recession is coming' signal. It's more like 'we're not sure what's coming'. Lucas: Exactly. And that's why this is so interesting. A steepening curve can be a sign of optimism if it's driven by growth expectations. But this one is driven by a mix of supply, inflation concerns, and a Fed that's about to ease into a slowdown. That's a different animal. Luna: And the VIX is sitting at fourteen point nine. That's still low, but it's up from where we were a few weeks ago. Is that consistent with this picture? Lucas: It is. The VIX at fourteen point nine isn't panic, but it's not the complacent sub-thirteen we saw in the spring either. And remember, we did an episode on how a collapsing VIX can be a warning. Now we're seeing it creep back up, which tells me investors are starting to pay attention to the bond market's message. Luna: So what does this mean for the average person who's got a 401 and is wondering if they should be doing anything different? Lucas: I think the biggest takeaway is that the era of 'just buy the dip' might be getting more complicated. When the curve is steepening like this, it's not a green light for aggressive risk-taking. It's more of a yellow light. You want to be thinking about quality, about companies with strong balance sheets, about dividend payers that can weather a slowdown. Luna: And that's exactly what Berkshire Hathaway seems to be doing. Greg Abel is starting to deploy that massive cash hoard. That feels like a big signal. Lucas: It really is. Berkshire's cash pile has been a topic for years, and now that Greg Abel is in charge, he's making moves. The earnings report showed that they're finally putting that money to work. And the fact that they're doing it when the yield curve is steepening and the VIX is off its lows tells you they see opportunities in the dislocations. Luna: Do we know what they're buying? Or is it still a mystery? Lucas: They're not required to disclose until they file, but the market is speculating. Some think they're adding to financials, some think they're buying consumer staples. What's notable is that they're not just sitting on cash earning four percent. They're actively looking for value, which is a pretty strong statement about where they think the market is headed. Luna: So if Berkshire is moving from cash to equities, is that a contrarian signal? Because usually they're more cautious. Lucas: It could be. But it's also about relative value. If you can buy a solid company with a three percent dividend yield and growth, that's more attractive than a ten-year Treasury at four point six nine, especially if you think rates are going to come down. That's the kind of calculation that makes sense in a steepener. Luna: Right, because if the Fed cuts, bond prices go up, but so do stock multiples. And if you're getting paid to wait, it's a different ballgame. Lucas: Exactly. And that's why I think the real story here isn't just the yields themselves, but what they're telling us about the market's expectations. The bond market is saying 'we're not sure about growth, but we're not pricing in a recession either.' The stock market is still near record highs, with the S&P 500 up two point one percent over the last five days. That's a disconnect. Luna: A disconnect that could resolve itself with a correction, or with earnings catching up to expectations. Lucas: Right. And that's the million-dollar question. For the average investor, I think the lesson is to be selective. Don't just buy the index on autopilot. Look at sectors that benefit from a steepening curve, like financials. Look at companies with pricing power. And maybe take a little bit of risk off the table if you're overexposed to tech. Luna: Is there a historical precedent for this kind of steepening? When have we seen this before? Lucas: The classic example is the early 2000s, after the dot-com bust. The Fed was cutting, but long-term yields stayed elevated because of supply and inflation concerns. That steepening happened alongside a choppy stock market, and it rewarded investors who were in value and income names, not the high-flying growth stocks. Luna: That sounds familiar. And it's a good reminder that the market doesn't always give you a clean signal. Sometimes it's just messy. Lucas: Speaking of messy, one thing that's been on my mind is how much of this is just a reaction to the jobs number. The July miss was pretty significant, and the immediate reaction was 'Fed is going to cut.' But then you see the long end climbing, and you realize the bond market isn't buying the 'everything is fine' narrative. Luna: So what's the one thing you want our listeners to take away from this episode? Lucas: I'd say it's this: the yield curve is steepening for a reason, and that reason is uncertainty. It's not a crash signal, but it's not a green light either. Pay attention to the quality of what you own, and don't be afraid to hold some cash if you can get four percent on it while you wait for better opportunities. Luna: Yeah, and honestly, if this conversation helped you think about your own portfolio a little differently, that's exactly what we're here for. If you ever want to support what we do and keep it ad-free, there's a link at buy me a coffee dot com slash fexingo. No pressure, but every bit helps. Lucas: And to be clear, we're not saying go out and dump your tech stocks today. We're saying understand what the bond market is telling you, and make sure your investments match your risk tolerance and time horizon. That's what surviving a bear market, or even just a rough patch, is all about. Luna: Absolutely. And with the VIX where it is, it's a good time to review your plan, not to panic. Lucas: Right. So keep an eye on those yields, keep an eye on what Berkshire does next, and remember that the best strategy is often the boring one: diversify, keep costs low, and stay patient. Thanks for being with us.