Bull Steepener: The Trade That Fixes Everything

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Dillian discussed Bull Steepener: The Trade That Fixes Everything. Here’s an excerpt from the episode:

Jake: The bear steepener.

Tobias: -the bear steepener, yeah, where the 10-year rises rather than the front end coming down. So, I think it’s been inverting for the last six weeks.

Jared: Well, the bear steepener is the trade that makes no fundamental sense, but you have to respect it because it’s the pain trade. We had the pain trade of the bear steepener for quite a few months.

Tobias: Yeah. With the 10-year coming off, that seems to be over. That ended like late September, early October.

Jared: Yeah.

Tobias: Typically, the inversion normalizes, and that’s the event that most closely precipitates the declaration of the recession. And so that looked like that was going to happen by virtue of the fact that it was going to be a bear steepener. But now the 10-year is dropping, and so the 10-3 is reinverting as a resolve.

Jared: Yeah. The bull steepener is the trade that fixes everything. Like, when 2s are coming down faster than 10s, that’s the trade that fixes everything. That makes gold go up, that makes stocks go up, that makes risk assets go up. So, you have this period of time right before a recession starts where it feels really good. So, the same thing happened. I want to say, I had this trade on in like 2007, 2008. I can’t remember, but I had a steepener on and it was literally the exact same playbook. And so I put on the steepener at zero basis points, 2s, 10s, and I took it off at 100, and then it went to 250.

Tobias: So that’s anticipating the normalization?

Jared: Oh, yeah, absolutely. Yeah.

Tobias: Why wouldn’t you put that on now, or do you have that on?

Jared: Well, I have one leg of it on. So, I’m long 2s. I’m not short 10s. I don’t like putting on curve trades in my personal account, because it chews up a lot of commissions and it’s complicated, but I am long just a ridiculous amount of two-year notes. Speaking of financial stress, that’s been causing me stress for the last couple of months, [Tobias laughs] but that seems to be getting better.

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