Rising U.S. Treasury Yields Could Spell Trouble for 2025 Economy

As the U.S. approaches the 2024 election, economic indicators are signaling turbulence ahead

As the United States approaches the 2024 election, key economic indicators are signaling potential turbulence ahead. One notable trend that has garnered attention among financial analysts is the "bear steepening" in the U.S. Treasury yield curve.

The yield curve visually depicts the yields on U.S. Treasury securities across varying maturities, typically ranging from three months to 30 years. Traditionally, the yield curve slopes upward, indicating higher yields for longer-term bonds. This reflects the fact that investors generally demand a higher return for committing their funds over an extended period, especially considering the potential risks involved.

However, for more than two years now, the yield curve has been largely inverted, a scenario in which short-term yields surpass those of long-term bonds. This particular configuration has historically served as a predictor of an impending recession. In recent months, this inversion has gradually reversed, leading to a steepening of the yield curve.

This steepening occurs when long-term yields rise faster than short-term ones. While a steepening yield curve is typically viewed as a favorable economic sign, the recent trend has been particularly sharp in the 10-year and 30-year Treasury bonds, whose yields are up by 2.41% and 2.33%, respectively.

A bear steepening is a specific type of steepening characterized by rising yields across the board, but with longer-term bonds climbing more aggressively than short-term ones. This often reflects market expectations of higher inflation and possibly greater government borrowing—both of which tend to push yields up on longer maturities. It serves as a warning signal that market participants anticipate potential economic struggles, even a deep recession.

The recent steepening in the yield curve has indeed raised concerns among some economists and investors, especially in light of the fact that an inverted yield curve has preceded every major American recession, including the Great Depression. This period of inversion, paired with the subsequent steepening, often signals the economy's transition from a recessionary warning to a potential downturn.

In this case, the bear steepening in the yield curve aligns with rising inflation fears and market anxieties over a possible pivot by the Federal Reserve to rate cuts if the economy weakens further. This shift in monetary policy could further complicate the economic outlook.

Moreover, the recent steepening in the yield curve is also being compounded by a tendency among investors known as risk aversion. This behavior typically prompts investors to shift their portfolios towards safer assets during periods of economic uncertainty.

One manifestation of this risk aversion is the ongoing surge in bond purchases, as investors seek the relative stability offered by fixed-income securities. Another trend that reflects this aversion to risk is the increasing investment in bitcoin exchange-traded funds (ETFs), as digital assets have experienced a renewed surge in popularity among retail investors.

These trends underscore a growing desire among investors to secure value amid the current economic volatility, which could have broader implications for the U.S. economy and financial markets in the coming months.