It was just Wednesday afternoon when we noted the following:

It’s starting to seem like stocks are worried more about a recession than they are runaway inflation – curve is starting to flatten pretty aggressively.

The is something that Bloomberg’s Ye Xie observed as well, noting that “in early February, the stock correction was accompanied by a steepening yield curve, as the surprisingly strong wage growth caused a simultaneous selloff in Treasuries and equities [but] now, stocks are falling as the yield curve flattens.”

This week’s action is set against a backdrop of lackluster retail sales (which triggered some downward revisions to folks’ GDP forecasts) and a CPI report that printed inline, perhaps vindicating those who think the inflation narrative is overblown.

Fleeting episodes of bear steepening notwithstanding, the overall trend has been a steady grind lower to what many assume is a date with inversion, perhaps catalyzed by a Fed that accidentally hikes the economy into recession.

Well happily, the best analyst on Wall Street is out on Thursday with a brand new note discussing exactly these points.

We are of course talking about the incomparable Aleksandar Kocic from Deutsche Bank who calls this “just another realization of the ‘breather’ mode.”

“It started with bear steepening (BeS) from mid-Jan to 8-Feb, followed by bear flattening (BeF) after that,” Kocic writes, adding that “the reaction of vol reflects this mode of the curve: a bid for long tenors as the market inhales followed by partial retraction, its mirror image.”


Kocic goes on to note what we said above – namely that over the long-term, it’s a steady grind tighter or, more to the point, a net flattening:

This “breather” mode is nothing new; it is a continuation of a persistent pattern post-2013. The mode consists of two parts: the market inhales during short episodes of volatile bear steepening (BeS) followed by extended exhale periods of bear flattening (BeF) grind.



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