Just today, the US yield curve has steepened the most in 4 years.
The gap between 2Y and 10Y Treasury yields has widened to about 0.71%, its highest level since Jan 2022.
Let me show you why this is very bearish for the markets.
When 10Y yields rise much faster than 2Y, it causes a bear steepening.
This happens when investors get concerned about inflation, fiscal policy, and even the debt.
And how does it impact the market?
When this happens, investors move away from risk-on assets.
The dollar gets stronger, less liquidity flows into stocks, and investors pivot to safe heaven assets.
The current bear steepening is due to hawkish Fed and Powell comments regarding unsustainable fiscal policy.
How does the economy respond to it?
Since 2000, every bear steepening has resulted in a market crash and recession.
Since 1970, bear steepening has predicted 7 out of 8 recessions.
And the market is already sensing that.
This is why Gold and Silver are showing quick recovery, while stocks and crypto are lagging.
What could happen next?
If the gap between 2Y and 10Y Treasury yields continues to widen, the stock market could experience a crash.
This will take down the crypto market too, as it's the most sensitive to liquidity.
And that's when the Fed will step up to do aggressive rate cuts and QE, sending assets to new highs.