HAVE you ever noticed your ability to tune out background noise? So much, you don’t even hear when it stops? Investors do this now with a key global economic indicator: the “yield curve” … which is silently re-steepening. You can profit.
The “yield curve” has over a century-long history as a great leading economic gauge. It is a graph showing the gap between short-term and long-term government bond rates, which typically “curve” upwards from three-month yields on the left through 10-year yields on the right.
The difference between the longest and shortest rates (usually 10-year and three-month) is the “yield spread”. When the spread is nicely positive, the curve is called “steep” and signals economic growth – bullish. When negative, it is “inverted”, which generally but imperfectly predicted recession. Why? I will show you shortly.
In late 2022, global curves inverted, including the most widely watched one – America’s. US stocks’ bear market had just ended, but no one knew it. Instead, folks foresaw down markets, remembered the curve’s recession-predicting prowess and worried more downside loomed. Since US recessions typically mean global recessions, the whole world dreaded the market impact. Economists globally predicted recession. Analysts were bearish.
But recession didn’t happen – in America, Singapore, Asia or Europe. Some had tiny GDP contractions, such as Singapore in early 2023, but growth won. The yield curve stayed inverted in 2023 and 2024, but stocks rallied. So everyone tuned it out, ignoring the beeping. Now the curve is steep. The beeping is gone, but no one notices.
This is a classic error: When something stops “working”, people move on, thinking that it is permanently broken. It is better to think of economic indicators like your car’s dashboard. A “check engine” light does little unless you pop the bonnet and see if the dash is right or misfiring. If misfiring, you must determine why.
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The yield curve mainly predicts bank lending. The government rates it shows are normally reference rates for banks’ funding costs (short rates) and loan revenues (long rates). Banks aren’t charities – they lend for profit, generally requiring more compensation for more risk taken. Since they borrow at short-term rates to fund long-term loans at long-term rates, the spread is their profit margin.
A steep curve means big profits, inspiring banks to lend eagerly to a wide swathe of borrowers. A flat curve shrinks profits, slowing lending as banks choose carefully. An inverted curve erases profits, discouraging lending.
In our modern world, with fractional reserve banking, banks create most new money through lending. When lending stops, money supply and velocity dry up. The economy runs out of gas. Recession hits. Bear markets often pre-price this.
So an inverted yield curve signals trouble if it predicts a fall in bank lending – if it truly represents banks’ profit margins. In 2022, 2023 and 2024, it didn’t. The engine was fine.
Banks then had huge stockpiles of super-low-cost deposits, letting them profitably keep lending. Households and businesses globally hoarded cash in Covid-stricken 2020 and 2021. That stockpile came and never left because of extraordinary cash hoarding from Covid’s life and death terror and its aftermath.
So banks’ deposit base costs remained firmly below 1 per cent globally while central banks hiked sovereign rates trying to fight inflation, a never-before-seen combo. Average deposit rates in Singapore stayed well below three-month sovereign yields. With such a large, low-cost deposit base banks kept lending. Economies grew modestly. Stocks rose in surprise.
Now, yield curves are silently steepening, flipping positive virtually unnoticed. Partly that came as some central banks cut short-term sovereign rates (such as America and Europe), and partly because long-term rates rose outside Singapore (which most view with dread – dread being also bullish).
Money flows almost freely across borders, so I use a GDP-weighted global yield curve. Since last June, its spread flipped from -0.66 percentage point (ppt) to 0.52 ppt – a quiet 1.2 ppt lending boost.
The steepening came mostly outside America, whose spread is a flattish -0.01 ppt. Continental Europe’s leapt from -0.53 to 1.02! Singapore’s went from -0.56 to 0.39.
Stocks are screaming, “pay attention!” The MSCI Europe sits near all-time highs, leading world markets this year. The Straits Times Index shines. America lags.
Steeper curves pump value stocks (such as Europe’s and Singapore’s) versus growth stocks (dominating America). European financials – up 26.3 per cent – quietly lead in 2025, obliterating US tech’s -3.8 per cent. Why? The global shift boosts bank profits! After building capital buffers last year, Singapore’s banks project a lending boom. Your value-heavy Industrials are already partying. More lending means more capital to grow and multiply earnings.
That most observers still ignore the curve as key – stocks haven’t fully priced its growing bullish power yet. Expect it to drive lasting European leadership and boost developed Asia.
The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally
