The Periphery

The author argues that the US government's war spending and Fed policy will push up Treasury yields and drive a dangerous bear steepener in the bond market. The argument starts from the claim that Israel's war against Hamas could escalate into a costly conflict the US funds as it did in Iraq and Afghanistan, which the author says cost $10 trillion. The author contends that the Fed's signal of a rate-hike pause let long-end bond investors sell, and cites Fed comments from Neel Kashkari, Logan and Daly in October 2023 as context. The piece then sets out a mortgage hedging example to explain why rising rates threaten bank balance sheets.