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The yield curve has steepened for three consecutive years, and the prevailing narrative says the US curve is on track to make it four. Consensus feels comfortable. Which is usually the moment to ask an uncomfortable question: what could possibly go wrong?

Anyone who trades or invests in bonds knows that talking about “the curve” is meaningless unless you specify which part of it. There is also an important difference between being right in principle and making money in practice. Curve calls live and die by segment, timing, carry, and magnitude.

The chart we show below highlights this point clearly by comparing the shifts in the US Treasury and German Bund curves since the start of the year. The Bund curve has steepened decisively across its entire length, from front to back, delivering both bullish and bearish steepening. Yields out to 12 months have fallen, while those from two years onward have risen – and at an accelerating pace. By contrast, the US curve has simply shifted lower almost in parallel below the seven‑year point. Apart from in the longer maturities, which rest beyond this midpoint, there has been little meaningful steepening at all, a result that will have frustrated the consensus positioning for a steeper US curve.

Understanding why these two curves have diverged is key to thinking about what might come next. Continue reading here.

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