Market agents focused on the 2yr-10yr T-note spread and are missing half (or more) of the story. It’s like trying to fix your brakes by looking under the hood at your engine.
In today’s world we use SOFR (Secured Overnight Funding Rate) instead of the short-term T-bill. The 30-year T-bond is the same security reference Laurent used. Comparing what is happening with the spread between SOFR-30yr and the spread between 2yr and 10 yr T-notes reveals the market dynamic and how it has changed.
The Great Un-Inversion (Early 2025): The traditional 2-10 Treasury spread climbed out of its persistent negative territory around January 2025 as the front end began pricing in long-term inflation uncertainty and increased fiscal borrowing supply. [1]
The 30Y Treasury vs. SOFR Surge: The spread between the long-term 30-Year Treasury bond and the overnight repo benchmark (SOFR) expanded significantly. With the 30-Year Treasury yield breaking out to long-term multi-decade highs near 5.70% and 30-Day Average SOFR remaining near 3.74%, the term premium expansion has driven this spread past 1.80%. [See sources at end]
Kotok interpretation.
First look at the dynamics.
- Yield Curve Inversion & Normalization: Observe how the 2-10 spread behaves during macroeconomic transitions, shifts in Federal Reserve policy rates, and the subsequent path toward curve re-steepening.
- Short vs. Long-Term Divergence: Notice how the overnight SOFR benchmark relates to the heavily discounted or premium-priced 30-year long bond yield during shifting market liquidity regimes.
Here’s my analysis of why.
The 2-10 is trying to capture an economic outlook. So, it looks at the term structure of Treasury yields in the middle of the range of maturities. 2 years is far enough away from the Fed’s policy rate to be priced with market forces stronger than the Fed’s policy forces. The other end of the spread is the 10-year note yield, and it has become the worldwide standard for sovereign debt maturity comparisons. So, everybody uses it to guess about the future economic outcomes.
Right away Goodhart’s Law applies. To paraphrase: when everyone uses an indicator to forecast something, it loses its efficacy. Another way of saying it: When the 2-10 is the highlighted measure flashing in the corner of your TV screen, you know it is ubiquitous in usage and therefore cannot help you predict anything.
The SOFR-30-year spread is sending a different message from financial market agents. That message is set by real-money investors, not TV talking heads or economy forecasters. That message shows the rate of change in the 30-year is much faster than SOFR. The Treasury term structure is steepening, and it is called a bear steepening because the bear is growling in the bond market.
Why?
Bond investors worry about inflation, of course. They also worry about liquidity to finance transactions. And they worry about the longer-term future pricing when the rate of issuance of additional bonds is seemingly an endless increasing element. That is what the federal deficit warning is all about. Deficit fears show up in a bear steepening.
The 2-10 spread is a nearer-term economics indicator, not a financing indicator. It says things are going to be reasonably okay for a while longer.
The SOFR-30-year spread says the longer-term policy track of the United States is troubled. SOFR-30-year says Trump’s economic policies have failed. His tariffs are a disaster. His war policy means much more federal spending on defense. And he has ignored the deficit. The SOFR-30-year spread goes on to say he won’t do a thing about it until he leaves office. Meanwhile, POTUS continues to attack the only adult in the room, the Federal Reserve. And the SOFR-30-year spread indicates Secretary Bessent’s attempts to manipulate bond markets have failed and the pricing mechanism proves it. SOFR is anchored by the Fed.
And the Fed is silent because it must be non-political. But the latest Trump attack on three Federal Reserve Governors can only make things worse. Worse means more steepening pressures. Note that the 10-year CDS on the United States Treasury debt is up 10 basis points from where it was before the latest round of Trump’s midnight Fed attack screeds. The 10-year price of credit default insurance on UST is 49 basis points. That’s 40 bps higher than at the time of the Great Financial Crisis.
“The minutes of the September FOMC meeting came out yesterday afternoon.
https://www.federalreserve.gov/monetarypolicy/fomcminutes20260916.htm
The minutes did not record anyone, including FRBNY staff, Board staff, or meeting participants, saying that concerns about the U.S. fiscal outlook contributed to the rise in Treasury rates over the intermeeting period. So, either 1) no one made the observation, 2) the observation was made but censored from the minutes, or 3) I am wrong to think the U.S. fiscal outlook may have contributed to the rise in rates. (Strictly speaking, the observation could have been made by one non-Chairman meeting participant; two have to make a remark for it to make it into the minutes.) The third possibility is the least worrying. This is yet another set of minutes I want to compare with the transcript when it comes out in 2 years.”
The bear steepening has attracted a lot of attention in the investment world. Many advisers are recommending reallocations to bonds. Bear steepening can present opportunities. I will defer to the advisers and readers who are encouraged to discuss this with their advisers and ask hard questions like: How do you analyze the credit quality, and why do you choose the specific maturity?
Just a note to consider: the CCC-Treasury spread for these non-energy sector low-quality bonds is over 10%. That is up 4 full points from a year ago. When looking at bonds now, I suggest separating out the energy-related debt from the non-energy to get a better picture.
In my own account, I like long-term tax-free munis and own them. I favor specific bonds of a type that provide me with the highest yields and that are the longer terms. I don’t have bonds that are in the 2-10 middle range. It’s a bear steepening time, so I don’t believe I am getting paid enough to own the middle range maturity. But the very long term is paying me a lot more now. And I can compound the interest at an interest rate that is well above the inflation rate. That makes sense to me.
In sum, we have morphed into a bear steepening. The cause is policy failures. The fix is to change the policy. That won’t happen without a change in the policymaker and that is not likely for a while no matter what happens in the midterms.
The bear steepening is likely to last until it causes an economic dislocation. That will show up in the 2-10 spread.
So, use one spread for one purpose (economics). Use the other spread for financial decision-making in your investment strategy.
Metaphor. If you need to fix your brakes, look at the wheels. If you need to tune your engine, look under the hood. Of course, if the brakes and the engine run on electricity, make sure your power source is reliable. The power source in Washington is NOT reliable.
And remember: This is not investment advice. I’m old. I use an abacus, not AI. 😊
Consult your adviser about decisions. Ask hard questions. Good luck.
David Kotek- Excerpts from The Kotek Report 10/18/2026
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