Don't Celebrate US Stocks Too Soon? Powell Triggers Warning of 'Bear Steepener' in Treasury Market

The U.S. Federal Reserve's decision to hold interest rates unchanged has been overshadowed by alarming signals from the bond market. Chair Jerome Powell's failure to adopt a tougher stance on persistent inflation has pushed long-term Treasury yields sharply higher, resulting in a phenomenon known as a 'bear steepener,' where long-term yields rise faster than short-term ones.

Spencer Jakab, columnist for The Wall Street Journal, warns this is not the 'Goldilocks moment' of economic revival, but instead reflects growing market anxiety over inflation, fiscal sustainability, and the Fed's credibility.

On Wednesday, the Fed kept its overnight rate steady. However, following Powell’s press conference, U.S. stocks briefly dipped while long-term Treasury yields climbed to their highest level in 19 years. Although tech stocks later rebounded strongly, the bond market's warning signal remains intact.

A 'bear steepener' occurs when bond prices fall and yields rise, with long-term yields increasing more than short-term yields, steepening the yield curve. This environment earns the 'bear' label because long-dated bond investors face significant losses, though it does not necessarily mean an immediate stock market downturn.

Yield curve steepening can be positive if driven by improved growth expectations—as seen in 2003, 2009, and 2021 during post-recession recoveries. But the current U.S. economy has already been expanding for years, making the rapid rise in long-term yields more reminiscent of 1966 and 1987.

After 1966, U.S. stocks entered a roughly 16-year stagnation, with nominal indices flat and real purchasing power eroded by inflation. In 1987, the steepest single-day crash in U.S. stock history occurred, amid a sharp rise in bond yields.

Jakab emphasizes these historical parallels don’t guarantee a repeat collapse, but they show that when long-term yields surge without a recession, equities may not benefit as they do in early recovery phases.

U.S. inflation has exceeded the Fed’s target for over five years, and the labor market shows no clear signs of weakening. Markets had hoped Powell would reinforce his hawkish rhetoric with concrete policy action or clearer forward guidance, but he did not.

Instead, Powell stated that rising long-term yields, which naturally tighten financial conditions, mean the market is 'learning how to play ball' without relying solely on the central bank as referee. This was interpreted as Powell allowing the bond market to lead monetary tightening rather than hiking rates immediately.

However, Greg Ip, chief economics commentator at The Wall Street Journal, argues the Fed is not a neutral umpire but the most influential player in the market. If the central bank fails to control inflation, rising yields and declining policy credibility could reinforce each other, eventually forcing the Fed into more aggressive rate hikes.

In the 1970s, after inflation spiraled out of control, the U.S. paid the price with severe monetary tightening.

Beyond inflation, the U.S. fiscal situation has become a new concern for long-term bond investors.

Publicly held U.S. federal debt is nearing $40 trillion. Buying a 30-year Treasury bond means trusting that the U.S. government will maintain the debt’s real value over decades.

While outright default is not expected, with debt and deficits continuing to grow, the government may resort to higher inflation to reduce real debt burdens. This prompts investors to demand higher term premiums, pushing up both nominal and real yields on long-term bonds—real yields now at multi-decade highs.

Jakab warns that if Powell underestimates or deliberately ignores this risk, bond investors will lose patience first, followed by equity investors demanding higher risk premiums. Rising long-term yields not only depress stock valuations but also increase corporate financing costs, particularly hurting high-P/E tech stocks.

Corporate markets show clear divergence: Microsoft (MSFT-US) added about $450 billion to its market cap in a single day—largest in corporate history—while Apple (AAPL-US), after earnings, saw its after-hours share price drop, potentially wiping out $350 billion in market value.

In Asian markets, SK Hynix and Samsung Electronics surged over 25%, continuing the rebound in AI-related stocks. Pre-market, Amazon (AMZN-US) rose over 12% on accelerated cloud growth and raised capital expenditure outlook, while Roblox (RBLX-US) fell over 16% due to slowing revenue growth forecasts.

Overall, the tech rally shows AI investment enthusiasm remains alive. Yet, the bond market is no longer focused merely on whether the Fed will hike rates, but on whether the central bank can maintain credibility on price stability. If long-term yields keep climbing, even strong earnings may not shield U.S. stocks from valuation downgrades and rising funding costs.