Trump’s war on the Fed created a ‘twist steepener’ in the bond market and it’s hurting the dollar

Jim Edwards is the executive editor for global news at Fortune. He was previously the editor-in-chief of Business Insider's news division and the founding editor of Business Insider UK. His investigative journalism has changed the law in two U.S. federal districts and two states. The U.S. Supreme Court cited his work on the death penalty in the concurrence to Baze v. Rees, the ruling on whether lethal injection is cruel or unusual. He also won the Neal award for an investigation of bribes and kickbacks on Madison Avenue.

The S&P 500 hit a new record above 6,500 for the first time ever yesterday, and futures contracts on the index were down only a little before markets opened this morning in New York, indicating that investors are relatively sanguine about equity valuations being as high as they were right before the dotcom crash of 1999-2002.

Over in the bond and currency markets it’s a different

A “bear steepener” implies a bear market for the prices of bonds. (Bond prices move in the opposite direction of their yields, so if treasuries’ yields are going up it’s because their prices are going down). The “bear” aspect comes from the notion that if the yields on both short-term bonds and long-term bonds are rising, but the long-term yields are rising faster, increasing the spread between them, then that implies a broad loss of confidence in what investors usually regard as a low-risk asset.  

This is bad news for the dollar, according to Convera’s George Vessey. The dollar’s value is tied to the value of short-term interest rates set

The spread between the yields of the 2-year bond and the 30-year bond was at its widest for three years earlier this week, according to Jim Reid and his team at Deutsche Bank. “That left the 2s30s curve at its steepest level since January 2022,” they said. 

The 2-year yield has since gone up a bit, but the yield curve between the 2-year and the 30-year continues to climb:

So the debate is, will the curve continue to steepen because 2-year yields decline as 30-year yields stay high (a “twist steepener”)? Or because both 2-year and 30-year yields go up, with the latter growing faster (a “bear steepener”)?

“The yield curve is twist-steepening: short-end yields are falling on rate cut expectations [from the Fed], while long-end yields rise amid fiscal concerns and inflation risk. That’s rarely dollar-supportive, as it signals weaker growth and eroding policy credibility,” Vessey told clients in a note this morning.

Why is this happening? The loss of “policy credibility” around U.S. dollar-denominated assets has a real price, Vessey argues.

“Political interference is compounding the issue, with Trump’s continued testing of the Fed’s independence undermining investor confidence in the central bank’s autonomy,” he said. “At the core is a rare convergence of structural shocks. Tariffs are dampening consumer and corporate demand, dragging on GDP. Simultaneously, immigration constraints are tightening labour supply, curbing potential output and stoking wage pressures. These twin shocks slow growth without a clear inflation offset.”

Here’s a snapshot of the markets prior to the opening bell in New York: