Control Panel: "Bear steepening" in bond yields

The Treasury bond yield curve has been deeply inverted since late 2022 when the Federal Reserve’s campaign of increasing the Fed funds rate brought the overnight rate above longer term yields. In the past few weeks, the yield curve has flattened as the long-duration yields rose even though the fed funds rate hardly budged.

Investors Bet That High Rates Will Linger

‘Bear steepening’ trade drives 10-year Treasury yield close to a decade-plus high

By Sam Goldfarb and Matt Grossman, The Wall Street Journal, Aug. 6, 2023

The yield on the benchmark 10-year U.S. Treasury note has surged close to its highest level in more than a decade, lifted by new bets that a strong economy could support years of higher interest rates…

The recent climb in longer-term Treasury yields — which play a role in determining the cost of everything from mortgages to stocks — comes even as yields on shorter-term bonds have stalled. That is a sign investors think cooling inflation and resilient economic growth will allow the Federal Reserve to stop raising rates, then leave them unchanged at least until the end of the year…

Analysts call the pattern a “bear steepening,” because bond prices are falling and longer-term yields are climbing relative to short-term ones, which would normally increase the gap between them. Bond yields rise when their prices fall…

Signals from the Fed that it is at or near the end of its rate-raising campaign have bolstered shorter-term Treasurys. But they have fed the selloff in longer-term bonds by reducing concerns that an aggressive central bank would precipitate a downturn…

Investors are now ramping up bets on a so-called soft landing, in which inflation returns to the Fed’s 2% annual target while the economy keeps on expanding.

The implications of that scenario could be profound, suggesting that the economy can withstand much higher rates than investors have long believed was possible… [end quote]

The 10-year Treasury yield has been in a secular declining trend since the late 1980s. Within that trend, yields decline during recessions (resulting in higher bond prices). It is typical for the yield curve to invert before recessions but to return to a normal (positive sloped) yield curve just before the recession starts.

The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity yield has been negative since July 2022. This predicts a recession which has not arrived … yet.

The latest real GDP growth rate of 2.3% is very respectable and certainly not recessionary. Total nonfarm payroll employment rose by 187,000 in July, and the unemployment rate
changed little at 3.5 percent, the lowest in decades. Unemployment claims are very low.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 3.9 percent. That is strong growth, not just a soft landing.

Fitch Ratings has downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’. he rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.

The U.S. Treasury Department announced on Monday that it faced greater borrowing needs in the coming months than investors had anticipated. That meant the market would need to absorb more bonds just as traders were finding them less appealing. These factors result in lower prices and therefore higher yields.

The stock market had a small decline last week but that could be noise. The Fear & Greed Index declined to Greed. The market’s risk appetite cooled a little. Both oil and natgas are stable within their channels. USD is in a declining trend with noise.

Stocks are back into bubble territory while bond yields are rising.

The Benefit of Owning Stocks Over Bonds Keeps Shrinking

Some worry the rally is unsustainable after a gauge of stocks’ relative value falls to two-decade low

By Sam Goldfarb, The Wall Street Journal, July 31, 2023

Yields on U.S. Treasurys largely reflect investors’ expectations for short-term rates over the life of a bond. Even if the Fed has reached the end of its tightening campaign, bond yields could rise further if the central bank keeps rates at current levels for longer than investors anticipate…[end quote]

As a fixed income investor, I maintain a bond ladder extending out years. As bonds (or CDs) mature, they are normally re-invested at the far end of the ladder. This works best with a normal, positively sloped yield curve when the higher yields are at longer durations. With the current negative yield curve, the longer durations have lower yields. This is because the market expects the Fed to cut the fed funds rate beginning next year when they expect inflation to decline to the Fed’s target of 2%.

The “bear steepening” of the longer duration bond yields may be an opportunity to extend duration with somewhat less pain. I have begun buying fixed income at > 5 years. (The bond market still considers this short term.) I haven’t yet begun to buy 10 years or longer but I’m thinking about it.

Are stocks in a durable bull market now? Despite the very high CAPE ratio? Is the soft landing locked in? Time will tell.

The METAR for next week is partly sunny. I think that last week’s stock market drop is noise. But maybe it’s the leading edge of a cold front moving in. Too early to tell.



Only if you’re trading stocks to fund this month’s rent. Trading in and out of bonds and stocks in response to market conditions is a loser’s game.

{{ {{ Suppose that you had invested your wealth in a broadly diversified set of stocks, starting in January 1871, with the dividends being rolled back into your portfolio, and with your portfolio being rebalanced every January to maintain diversification. If you had also paid no taxes and incurred no fees, you would have had 65,004 times your initial investment, as of this past January. By contrast, if you had performed the same experiment with long-term U.S. Treasury bonds, you would have only 41 times your initial wealth. }}

Stocks for the long run and “minimizing the skim” – the key to retiring early.

65,000 times you’re initial investment for the S&P 500 vs. 41 times for LT bonds?

Like Jack Bogel said, “Invest in a low-fee index fund and don’t look at your mutual fund statements until age 70. Sit down in a chair and take your heart medication before you open that last statement. You’ll be shocked.”



Agreed. If only 22 year old me had realized that… :frowning:


Favorite low-fee index funds? (Asking for a friend.)

Here’s the list. It’s just like buying a Medicare supplement – they’re all the same. Just buy the one with the lowest price (i.e. “expense ratio”).

For the same price, I’d favor the “Total Market Index” over the S&P 500.



The broad list including some things need to consider.

AS OF 12:52 PM ET 08/07/2023
ETF/ETP* Screener

ETP Type

Leveraged / Inverse
Not Leveraged or Inverse

Asset Class
International Equity, U.S. Equity

Net Expense Ratio

Equity: Style Box
Large Blend

Tracking Error

Tax Cost Ratio

Annual Turnover Ratio
22.74% and Below

Investment Philosophy
Passively Managed

Legal Structure
Open Ended Investment Company

Net Assets
$871.42M and Above

Number of Basket Holdings
None selected

Symbol ETP Name Net Assets Asset Class Net Expense Ratio Equity: Style Box Tracking Error Tax Cost Ratio Annual Turnover Ratio Number of Basket Holdings
VT VANGUARD TOTAL WORLD STOCK INDEX FUND ETF SHARES $29.6B International Equity 0.07% Large Blend 1.08 0.57% 4.00% 9,591
VEA VANGUARD FTSE DEVELOPED MARKETS INDEX FUND ETF SHA… $117.9B International Equity 0.05% Large Blend 4.64 0.71% 4.00% 4,054
VTI VANGUARD TOTAL STOCK MARKET INDEX FUND ETF SHARES $322.7B U.S. Equity 0.03% Large Blend 1.54 0.42% 3.00% 3,861
ITOT ISHARES CORE S&P TOTAL U.S. STOCK MARKET ETF $46.4B U.S. Equity 0.03% Large Blend 1.58 0.67% 4.00% 3,281
VTHR VANGUARD RUSSELL 3000 INDEX FUND ETF SHARES $1.8B U.S. Equity 0.10% Large Blend 1.51 0.40% 8.00% 2,989
VPL VANGUARD FTSE PACIFIC INDEX FUND ETF SHARES $6.7B International Equity 0.08% Large Blend 4.91 0.73% 6.00% 2,481
SCHB SCHWAB U.S. BROAD MARKET ETF™ $23.9B U.S. Equity 0.03% Large Blend 1.51 0.52% 4.00% 2,466
SPTM SPDR® PORTFOLIO S&P 1500 COMPOSITE STOCK MARKET ETF $6.8B U.S. Equity 0.03% Large Blend 0.9 0.68% 1.00% 1,525
VONE VANGUARD RUSSELL 1000 INDEX FUND ETF SHARES $3.8B U.S. Equity 0.08% Large Blend 0.88 0.38% 10.00% 1,013
SCHK SCHWAB 1000 ETF $3.0B U.S. Equity 0.05% Large Blend 0.91 0.51% 4.00% 990
SCHX SCHWAB U.S. LARGE-CAP ETF™ $34.7B U.S. Equity 0.03% Large Blend 0.72 0.52% 4.00% 761
VV VANGUARD LARGE-CAP INDEX FUND ETF SHARES $29.1B U.S. Equity 0.04% Large Blend 0.53 0.40% 3.00% 552
VOO VANGUARD S&P 500 ETF $340.5B U.S. Equity 0.03% Large Blend 0.01 0.41% 2.00% 508
IVV ISHARES CORE S&P 500 ETF $356.2B U.S. Equity 0.03% Large Blend 0 0.68% 3.00% 507
SPLG SPDR® PORTFOLIO S&P 500 ETF $19.9B U.S. Equity 0.02% Large Blend 0.01 0.68% 2.00% 506
GSUS GOLDMAN SACHS MARKETBETA US EQUITY ETF $999.3M U.S. Equity 0.07% Large Blend 0.67 0.67% 3.00% 496
GSLC GOLDMAN SACHS ACTIVEBETA® U.S. LARGE CAP EQUITY ETF $11.6B U.S. Equity 0.09% Large Blend 0.98 0.65% 12.00% 445
EFIV SPDR® S&P 500® ESG ETF $913.4M U.S. Equity 0.10% Large Blend 1.39 0.67% 6.00% 324
MGC VANGUARD MEGA CAP INDEX FUND ETF SHARES $4.3B U.S. Equity 0.07% Large Blend 1.62 0.39% 3.00% 232


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This works fine in a tax-deferred account, but not always in a taxable account. That’s because the lowest expense ratio today may not always be the lowest expense ratio in the future. In a tax-deferred account, that’s no problem, simply sell the one with the higher expense ratio and switch to the lower expense ratio one. In a taxable account, you can’t do that without paying a whole bunch of taxes, which stops a whole bunch of your compounding in its tracks.

That’s why I bought VTI instead of the Fidelity funds. Vanguard has had very low expense ratios for decades, while Fidelity only had low expense ratios for a few years now.

I now also regret buying VTI because it “forces” income on me each year that I would prefer not to accrue (pay tax on) right now. I now buy BRK.B instead, because it performs similarly, and doesn’t “force” a dividend on me.


Absolutely! BRK solves a host of problems.

My advice to “just buy the cheapest index fund” is geared to those just starting to save for retirement. If you’re successful, then you need to start worrying about the tax problems. That started for me at about age 40 when DELL and PFE went wild.


There was some discussion earlier about Fitch’s downgrade of the US and how the resulting stock market drop would affect our retirement plans.

Thing is, even after the drop the market was still up…for the month. With investing, most of the time doing nothing is the right thing. Even when doing nothing isn’t the right thing it is still usually pretty good.