Blain’s Morning Porridge Fed 25^th, 2026: What is the US Yield Curve Really Telling Us?

“When there is a lack of honour in government, the morals of the whole people are poisoned.”

Does the steepness of the US yield curve tell us the US Economy is about to boom, or inflation is about to sink the Treasury markets? To figure out which, you need to interrogate the witnesses and look at what the evidence is telling us.

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My ambition is to keep learning new stuff. Like this morning’s quote – from Herbert Hoover.

One of the things I enjoy most is sharing my experience of how markets work in practice. Aside from my careless Desmond (a Tutu) in Economics, my only qualifications to do so are gleaned from surviving 40 years in financial markets. My great delight is my honorary professorship at the Edinburgh Business School (which I suspect was because they felt I deserved a B+ for effort), but I have few academic chops as a great thinker or as a theoretical economist.

However, I do think markets, economics, and politics make a curious kind of sense, and if you dig deep enough…. it’s even possible to explain them and figure them out!

Yesterday I had the great pleasure to give a guest lecture on the bond markets to a classroom of American PhD Students at Brown University in New England (via Zoom). They are taking a class on the International Political Economy of Global Finance. It’s a fascinating course, run by my great chum, fellow-Scot, and genuine academic thinker, Professor Mark Blyth.

Mark is a guy who takes a deep interest in how complex things work. He picks them apart and asks difficult questions like why? He’s now applying that intellectual curiosity to take students deep into the foundations, architecture and plumbing of international finance. I’ve looked at the syllabus and if I had the time, I’d take the course myself – because it’s good to see ourselves as other see us, and wonder if there are better ways to think about the world, and how to action it.

The fact I got asked a lash of questions following my lecture was an added bonus.

One of the student questions clarified part of my own thinking on bond markets, and I’d like to share it as it sort of explains one of the causal linkages between politics and markets. A student asked me about what the yield curve is really telling us – she was wondering if a steep yield curve is a signal of high expectations for an economy in rude health as a steep curve suggests growth – because of its’ attendant inflationary pressures.

That’s very much an equity read on bond markets – stock pickers tend to be optimists, looking for upside joy, sweetness and light. We cite an inverse yield curve as an irrefutable signal a recession is imminent for the same reason.

But bond markets are dour, finding downside in a ray of sunshine. We see a steep yield curve as expressing an expectation of rising inflation for which bond investors demand a premium. Bond markets care only about prompt repayment of principal and interest and fear one thing, and one thing only: inflation. They fear what causes it.

The trick is therefore to figure out what the yield curve is really telling us about inflation by collating the evidence around it. What are the bodies on the floor and ransacked debris telling us about the outlook:

• A hot economy and inflationary boom as companies make money, innovate new technology, and consumers come together to spend more, or
• An inflationary bust triggered by bad policies likely to generate inflation.
• A stagflationary bust as bad policies lead to recession and inflation….

 Which naturally brings us to the USA, last night’s State of The Union rant, and my theory of the Virtuous Sovereign Trinity.

The VST simply states an economy with a stable currency, a sustainable bond market, and political competency, will tend do fine. Simple As. I quote examples of the Black Tuesday Sterling Rout in 1992 (engineered by a young Scotty Bessant then working for George Soros) for what a destabilised currency can do to an economy, or Liz the Lettuce Truss’s unravelling of the UK’s reputation for political competency in 2022 when she blithely announced a massive spend-more, tax-less budget which set off a calamitous slide in gilts, triggering margin calls on levered trades, that threatened to end the 320 year old Gilt market in a single foolish budget speech.

There is a fantastic website – https://www.ustreasuryyieldcurve.com – if you want to analyse the US yield curve without a BBerg.

Let’s look at the evidence in the US economy…. What have we got? Tariff mayhem, rising health care costs for the lowest in society, rising income inequality, and broken global supply chains and relationships, plus a potential war in Iran. Usual stuff.

Let’s start with the witnesses.

There is a great piece in the Washington Post this morning – a poll of 2300 Americans asking them the best and worst things Trump has done since his second inauguration. It highlights some key metrics for markets to consider when placing bets.

39% of US Voters approve of Trump’s performance as President. 80% of these cite his handling of immigrations (through deportations and ICE) is the best thing he’s doing. 45% of Trump supporters think he’s doing a great job on the economy, and 15% of them think the Big Beautiful Tax-cutting deal is a great thing. 14% think Tariffs will save America. Trump supporters coalesce around the border issue, immigration and security.

60% of US Voters disapprove of Trump, but they are not united by any one factor as Trump supporters are. 57% think the deportations and border issues are bad, 33% think the economy is a mess (29% of that was anti-tariff), 22% of them cite the endemic corruption around Trump, his violation of the constitution and the politization of justice is bad, 17% are deeply unhappy about Trump’s destruction of America’s foreign relationships, and 13% think the Epstein files will prove a massive issue.

Interesting. Lots of reasons for US citizens to feel concerned. But the actual gaps between pro and anti in immigration and the economy are quite small. (On immigration 36% of Americans are unhappy, while 32% love it. On the economy, 20% of Americans are fearful while 18% think Trump’s doing a marvellous job!)

The other evidence is mixed. Concerns on Fed Independence, and a potential stock market bust, or a private credit meltdown are balanced by rosy outlooks about rising corporate credit outlooks, lower rates triggering a housing recovery and the potential gains in productivity from AI. Over 50% of Americans are concerned about AI costing their jobs, and 10% fear losing them this year!

However, as a dour bond market guy… what do I really think. Three problems:

• Currency Stability: The end of dollar exorbitant privilege as the world starts trading between itself rather than through dollars – that means fewer dollars in banks being invested in Treasuries and a long-term weakening dollar, which will be inflationary.
• The Treasury Market: has to refund about 30% of its $38trillion outstanding next few years as global interest is tested, Trump offends and the risks around hegemonic change rise.
• Political Competency: Trump kept steady and made it through the State of the Union rant last night. How well is he likely to react to a no-see-um shock in Iran, or the Mid-terms… The chance of an unconstrained Trump blow off could well tip the Treasury market – especially if we have a no-see-um that triggers another inflationary shock…

All of which is telling me the currently steep US curve is factoring in bad policy resulting in inflation more than an economic boom.

Out of time… off to do the day job

Bill Blain

Author of the Morning Porridge

CEO Windshift Capital

Advisor – Spitfire Strategic Capital