So the yield curve has been normalized for a while now... here's my bearish thesis.
**TL;DR** Everyone watched the yield curve inversion, but **it’s the un-inversion that could mean the recession is coming soon**. The bond market is begging for rate cuts Powell can’t deliver. The Fed isn’t here to save the market. This is a policy trap, and most people haven’t looked down yet.
And for you regards that can actually read.
So a lot of people talk about the yield curve inverting as a recession signal, and they're not wrong, per se. Every US recession in the last 50 years was preceded by an inversion of the 2-year/10-year Treasury spread. But, it might not be the inversion that marks the start of the recession, it could be the un-inversion.
Recently, some analysts have observed that when the yield curve inverts, a recession tends to follow. In other words, after being inverted for an extended period, the U.S. yield curve often turns back to an upward slope (long rates above short rates) in the final stretch leading into a recession.
>In every case Deutsche Bank examined, the curve had re-steepened before the recession started. In the past four recessions - 2020, 2007-2009, 2001 and 1990-1991 - the 2/10 curve had turned positive by the time a recession occurred, according to a Deutsche Bank analysis published last year. The interval between a disinversion \[sic\] and the beginning of recession varied, ranging roughly between two and six months in those four instances.
[Source](https://www.reuters.com/markets/rates-bonds/us-yield-curve-nears-flip-with-jury-out-recession-signal-2024-07-29/#:~:text=In%20every%20case%20Deutsche%20Bank,steepened%20before%20the%20recession%20started)
>... over the last four cycles, short rates have fallen back to their “normal” position below long rates — that is, the yield curve “uninverts” — before the recession begins. ~~That uninversion has yet to occur.~~
[Source](https://blogs.cfainstitute.org/investor/2024/03/13/can-the-fed-pull-off-a-soft-landing/#:~:text=That%20judgment%20was%20premature,uninversion%20has%20yet%20to%20occur) (striked last sentence cause it's normalized now)
Why? Because that's the moment the bond market realizes the Fed is done hiking, and starts pricing in:
* A weakening economy;
* Slowing growth; and
* The eventual need for rate cuts.
In other words, investors pile into long-term treasuries for safety, pushing the yields lower. I'd consider this more *defensive* than bullish, basically smart money sees trouble ahead. Now, the yield curve flipped back to positive back in August of 2024, before we really knew the extent of all this tariff bullshit. So even though the curve isn’t inverted anymore, if it’s steepening aggressively ([like it is now](https://fred.stlouisfed.org/series/T10Y2Y)) **for the wrong reasons**, it's possibly a late-cycle recession signal.
**What's different this time around?**
The market thinks the Fed will cut rates soon to support growth. But here's the problem; **inflation is still too high**.
* CPI is re-accelerating;
* 1-year inflation expectations [just jumped from 3.1% to 3.6%](https://www.newyorkfed.org/microeconomics/sce#/); and
* Consumer sentiment just [hit the lowest level since 1981.](https://www.reuters.com/markets/us/us-consumer-sentiment-inflation-expectations-deteriorate-sharply-april-2025-04-11/)
Now let's add in Trump's proposed tariffs (whatever the fuck he eventually decides to implement). These are inherently inflationary, and even [JPow acknowledges that](https://www.cnbc.com/2025/04/04/powell-sees-tariffs-raising-inflation-and-says-fed-will-wait-before-further-rate-moves.html). So what happens when you combine i) a bond market pricing in rate cuts, ii) a Fed that can't (won't) cut, and iii) fiscal/political policy thats actively adding to inflation? Someone else (don't remember who) on this sub put it best, this could be our Wile E. Coyote moment where the market just hasn't looked down yet.
The "soft landing" narrative doesn't hold up under this setup. If growth slows and inflation stays sticky, Powell won't be able to cut to save the market without reigniting inflation. And importantly, Powell **does not serve the stock market**. His mandate is stable prices and maximum employment. During Trump's first term, he frequently criticized Powell and he still raised rates. Markets are up on pure momentum and political optimism, but **the Fed has absolutely no reason to intervene**. When that disconnect becomes obvious (possibly the upcoming Q1 GDP report on April 25), things could get ugly.
Anyways, I'm probably wrong cause in reality nobody knows what the fuck is going on right now, and as always, past performance doesn't guarantee future results. Nevertheless, buls r fuk.
