Steepener Fallacy

It seems like almost everyone likes steepeners. I don’t blame them – if you look at the chart below (showing 2s10s and the Fed’s target rate), post-Volcker, every time the Fed is done with an easing cycle, 2s-10s goes to 235bps (on average). It is currently at 70bps. Maybe it can drop 30% in an unfavorable scenario, and make 200% in a good scenario. Who wouldn’t want to sign up for that? HOWEVER, this is why I always say that when you look at historicals, you have to consider the relative environments.

But first the week in news:

· I’m debating if I want to write a longer post on Bitcoin, but that 50+% drop was surprising enough (even for a crypto non-believer like me) that I am wondering if there is something bigger going on. What we know for sure is that some whales liquidated. The question is why. In any event, I’m on slightly higher alert than usual, but at the end of the day, it’s only crypto.

· All the key secondary labor data last week was weak. But we get the big one next week. We are starting to get the GDP vs labor divergence I mentioned.

· I’m not sure if this is intentional to be distracting, but Trump seems to be more in the headlines since around the time of the Epstein data dump. Whether it’s him suing everyone (again), posting the Obamas as apes, suggesting taking more land (poor Mauritius), Trump Homes, whining at a prayer breakfast, more tariffs, trying to get everything named after himself, closing the Kennedy Center for “renovations”, etc. Or he may be just losing his mind.

· Cook (usually a dove) sounded hawkish on inflation. I’m wondering to what extent this is push-back against Trump and his lawsuit. Good luck, Mr. Warsh - don’t get sued by the Don. Jefferson (usually a dove) sounded neutral and Daly was her usual dovish self.

· Last week, some of you may have said, Warsh’s Shill score of 8 and Respectability score of 5 was a little harsh. The Economist podcast had this LLM scoring of Warsh’s speeches. Is there something Obama and Biden have in common, vs Bush and Trump? Hmm… I gave him a 5 only because all these people who worked with him came out of the woodwork to say he was such a great pick. Once again, my gut instinct on someone came through. I may be a blind squirrel at times, but there’s a reason hedge funds like what I have to say. So as I mentioned last week, you CANNOT assume the hawkish Warsh we got will be the Kevin we get (at least for the next three years) – and this includes the balance sheet. This leads me to my essay this week…

Steepener Fallacies

Early in the week, I was looking at the list of Bank trade recommendations and thought it was interesting that that the banks had the following longer-end “slope” trades:

• Barclays – no far slope

• BMO Capital Markets – short tens

• Citi - 5s30s steepeners

• Goldman Sachs – belly cheapening

• JPMorgan - 5s20s steepeners

• Morgan Stanley – mentions Warsh should steepen the yield curve

• Natixis - three-month 2s5s conditional bull steepener

• Societe Generale - 5s20s or 5s30s steepeners

• TD Securities - 2s10s flatteners

• Wells Fargo – no far slope

To summarize, if we ignore the two banks that had no longer-end slope trade recommendation, we have 7 calling for steepeners (or equivalent, since short the long end is a steepener if the fronts are unchanged) and one calling for a flattener. To be fair, three of the steepener banks are calling for one starting with 5s, which may be better.