Is the yield curve inverted?

The episode begins with Oswald hosting Steno, who is suffering from illness, to discuss macro trends. The primary focus is bond yields and the yield curve inversion. Steno explains that since late February/early March, long bond yields have been rising significantly—a global phenomenon following the Bank of Japan's pullback from yield curve compression. The key concern is that front-end yields (short-term rates) are now rising faster than long-term yields, approaching an inversion where 2-year yields exceed 10-year yields.

Steno contextualizes why the yield curve matters: historically, an inverted curve signals that the Federal Reserve has pushed rates above the neutral level needed for economic equilibrium, which the market interprets as indicating future slowdown. However, they note the curve hasn't fully inverted yet using Treasury metrics, though swap rates show closer inversion. Steno emphasizes that the AI buildout may be masking how restrictive rates truly are across the broader economy—AI can tolerate higher yields due to perceived unlimited returns and strategic importance, while other sectors struggle.

Regarding market implications, Steno presents historical data showing that equities actually perform reasonably well in the 12-15 months following curve inversion, despite short-term choppiness. The current environment represents 'Regime 4'—a business cycle killer where central banks deliberately restrict the economy. Banks' profitability depends on spreads between short and long rates; if the curve inverts significantly, lending incentives diminish. Steno argues this is a shortened, benign hiking cycle compared to 2022, noting that necessity price inflation currently sits at 25% versus 100%+ during crisis periods.

On US-China relations, both hosts agree Trump's summit with Xi kicked the can down the road without resolving core issues around rare earths and trade. They expect eventual re-escalation but believe energy market conditions need improvement first. Regarding Iran, they discuss how Iranian finances appear strained (supporting their earlier analysis), with Iran pushing for deal completion while Trump appears to be waiting until after midterms. They note progress toward peace talks and optimism about oil flows approaching 80% of pre-war levels, though refined products remain the critical constraint. They discuss potential Qatar-Iran deals to export refined petroleum as a possible solution.