Almost 40 years ago, Robert Laurent published a research paper with the Chicago Fed. In it he argued in favor of policy interpretation by taking the very short riskless T-bill interest rate and comparing it with the 30-year T-bond. The paper can be found here. https://www.chicagofed.org/~/media/publications/economic-perspectives/1989/ep-jul-aug1989-part3-laurent-pdf.pdf .
Image prompted by Norm Dempsey and rendered by ChatGPT
Thanks for reading The Kotok Report! Subscribe for free to receive new posts and support my work.
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.
Here’s the data in a table format. Remember we are looking at the change in the spread.
Interest Rate Spread Highlights
- 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.
1. 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.
2. 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.
Bill Nelson, Chief Economist at the Bank Policy Institute, caught the Fed’s silence and put this note in a recent missive. Email him if you want to get on this list. Bill.Nelson@bpi.com.
“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.
Reading List
US Treasury Yields
Bill Dudley and Jonathan Payne | Markus’ Academy, Princeton University
An excellent discussion featuring Bill Dudley and Jonathan Payne, hosted by Princeton University’s Markus Brunnermeier.
Markus’ Academya month ago · 11 likes · 1 comment · Markus’ Academy
Global Bond Markets: Marked to Market, Part I
Hanno Lustig | The Two Cents
“Government debt is being marked to market. We’re now relying on price-sensitive investors to absorb sovereign bond issuance going forward.”
The Two CentsGlobal bond markets. Marked to Market. Part I.
a month ago · 81 likes · 9 comments · Hanno Lustig
Risk-Free Status: A Practitioner Model
George Robertson | The Monetary Frontier | October 16, 2026
While George Robertson makes a strong case for US “riskless” status, I ask why the CDS term structure for American Treasury debt is upward sloping. If we’re riskless, it would be flat, as it was 15–20 years ago.
Kotok view: Market agents are making real-money bets that the US has lost its riskless status.
The Monetary FrontierRisk-Free Status: A Practitioner Model
14 days ago · 4 likes · 1 comment · George Robertson
CoreWeave Frightens Investors
David R. Kotok | The Kotok Report | October 15, 2026
We have long said that the credit default swap market is the early warning sign of deterioration. Today, we share MacroStrategy Partnership’s assessment about CoreWeave’s debt and CDS.
CoreWeave Frightens Investors
·
Oct 15
We have long said that the credit default swap market is the early warning sign of deterioration. The reason is that it shifts daily in response to information. Now we have the events surrounding CoreWeave.
The KotokReport Primary Data Sources
- 10-2 Year Treasury Spread Matrix:
- Data Identifier: T10Y2Y (Daily) and T10Y2YM (Monthly).
- Publisher: Federal Reserve Bank of St. Louis (FRED).
- Description: Calculated as the difference between the 10-Year Treasury Constant Maturity rate and the 2-Year Treasury Constant Maturity rate. Raw yields originate directly from the U.S. Department of the Treasury.
- 30-Year Treasury Constant Maturity Market Yield:
- Data Identifier: DGS30 (Daily).
- Publisher: Board of Governors of the Federal Reserve System (US).
- Description: Tracks non-inflation-indexed U.S. Treasury bonds adjusted to a constant 30-year maturity, quoted on an investment basis.
- Secured Overnight Financing Rate (SOFR) Averages:
- Data Identifier: SOFR30DAYAVG (Daily rolling 30-day compounded index).
- Publisher: Federal Reserve Bank of New York.
- Description: Represents the compounded daily average of the Secured Overnight Financing Rate over a rolling 30-day term, measuring the broad cost of securing cash overnight via repo transactions backed by Treasury securities.
David values thoughtful, reasoned, constructive responses from readers. To contact him, please send an email. The subject line should read “Response to [title of commentary].”
The complete Kotok Report archive can be found at www.kotokreport.com.
Disclosure:
The information posted on this website (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of David R. Kotok. David R. Kotok is an independent contractor. He may independently receive payments from various entities for consulting, advisory and board functions, speaking fees, book royalties, advertisements in affiliated podcasts, blogs, and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship, or recommendation thereof, or any affiliation therewith, by the Content Creator or by David R. Kotok.
Nothing on this website constitutes investment advice. It should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by David R. Kotok. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.
This content, which may contain security-related opinions and/or information, is provided for informational purposes only. Do not rely upon it in any manner as investment advice. It is not an endorsement of any practices, products or services. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.
Any charts provided here are for informational purposes only and should not be relied upon when making any investment decision. As always please remember investing involves risk and possible loss. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts has been obtained from third-party sources believed to be reliable; however, David R. Kotok makes no representations about the accuracy of the information.
