We have been receiving numerous inquiries regarding the Trump “trade” and its association with a rates market bear steepener, as well as the implications for broader asset markets.

Recently, a strong USD has emerged alongside the Trump trade, while there is also a noticeable shift in equities towards small-caps and re-inflation/low interest rate plays.

Homebuilders have surged nearly 10% in July, and the FTSE Construction and Materials index has soared following the Labour election victory in the UK. Additionally, SBBB in Sweden, a significant position in my personal account, has risen 15% this month. Financials continue to show strong performance, with Goldman Sachs and Nordea reporting robust numbers yesterday.

Our comprehensive data analysis on cross-asset markets under various yield curve regimes indicates that bear steepening is generally favorable for risk assets.

The USD shows mixed behavior in bear steepening scenarios, typically appreciating against the JPY while depreciating against the NOK, MXN, and CAD. Observing USD price action is crucial; a significant drop in USD/JPY and rise in USD/NOK might signal a transition to a bull-steepening scenario.

Recently, bear steepening has been detrimental to Gold & Silver (since the pandemic), but Silver tends to outperform Gold over longer periods in such environments.

Chart 1: Returns in various yield curve regimes