Bond Market Analysis: Are Rising Yields Still a Threat?

Is the yield curve’s recession warning signal no longer working?

A central part of Larsen’s argument is that the yield curve has recently failed to deliver the recessionary signals that historically accompanied curve “uninversions.”

Traditionally, a steepening after inversion has often preceded economic downturns, as seen before the dot-com crash and the Global Financial Crisis. Yet after the 2022 inflation shock, the curve began steepening again without triggering the recession that many macro analysts expected.

Larsen notes that markets spent years pricing in a downturn that never fully materialised, despite the curve behaving in line with historical recession patterns. He argues this repeated disconnect is important because it may indicate that the macro regime itself has changed rather than the relationship temporarily malfunctioning. In his view, the post-COVID environment has altered the mechanics linking bond yields and economic growth.

Rather than viewing higher long-term yields as automatically destructive, Larsen suggests they may actually support parts of the financial system. He highlights that commercial banks fundamentally operate by borrowing short and lending long. A steeper curve therefore improves banks’ ability to generate carry and profitability through maturity transformation.

During the era of quantitative easing, central banks compressed term premia and flattened the yield curve, which in Larsen’s opinion undermined the traditional banking model. Now that long-term yields are rising more freely again, he believes the curve is beginning to “normalise” and restore healthier incentives for credit creation. He writes that the banking system “quietly prefers a world where the curve actually slopes again, rather than one where it is pinned flat by design.”