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A Word On Bear Steepening
You wouldn't know it if your only frame of reference is the post-Lehman world, but bear steepening isn't a "normal" mode of yield-curve functioning.
The QE era changed things, but shocks used to arrive at the front-end of the curve, where rates are sensitive to monetary policy.
In the post-GFC world, though, front-end rates were anchored at the lower-bound. The back-end was the only place where movement was possible.
The figure above, from Goldman, illustrates the point. Note the prepondera
The first chart was pretty good, even though you can’t do much with it after, “Oh, wow.” The second one was above my pay grade and patience limit.
The second chart is interesting but hard to take much away from. Since bear steepening episodes have almost all been in one ten-year period, while bull steepening episodes have been all through the whole 70 years shown in the first chart, for all we know chart #2 merely reflects the difference between that 10 year period and the whole 70 years.
I did, however, think about how bear steepening might play out in equity investors’ heads. 10 year yield goes up. Equity investors think well, that must reflect higher long-term real growth prospects or higher long-term inflation prospects (only bond investors think about term premia). If the former, I should increase my default terminal growth rate. If the latter . . . hmm, the recent past shows that inflation is good for S&P 500 revenue and, somehow, margins too . . . so I should increase my default terminal growth rate. Voila, long rates go up and S&P 500 multiples don’t go down. What a trick.