In June 2025, I explained that the main risk to the markets might not be the rate hike itself, but rather the widespread adoption of the steepener trade. At the time, most investors were betting on a steepening of the U.S. yield curve: short-term rates were expected to gradually decline due to future Fed rate cuts, while long-term rates would continue to rise under the weight of budget deficits.
My concern was less about the direction of the curve than about the consequences of this positioning for the money market. The first signs of strain were already appearing in the SOFR, a sign that the flow of collateral was becoming more difficult despite a banking system that was still largely liquid. In hindsight, I believe that the steepener was not the problem in and of itself. It was simply the first visible symptom of a much deeper issue: the market’s ability to absorb a volume of public debt that was now growing faster than natural investor demand.
The Federal Reserve ap…
