HSBC's Steven Major: Fed Rate Hike May Spark Bull Steepening, Not Bear Flattening

The Quick Take

• HSBC's Steven Major argues the Fed rate hike may paradoxically produce a bull steepening of the yield curve rather than the typical bear flattening
• Long-term rates may fall as markets price in slower growth expectations even as short-term rates rise with the Fed funds rate
• Long-duration bonds could outperform if growth deteriorates faster than anticipated, catching consensus bear-flattening traders offside

Steven Major, HSBC's global head of fixed income research, is advancing a contrarian thesis that is gaining traction ahead of the Fed's rate decision: rather than producing the standard bear-flattening outcome seen in traditional tightening cycles, this hike may paradoxically trigger a bull steepening of the yield curve. Major's argument centers on a growth re-pricing dynamic — if investors believe the Fed's tightening will materially slow economic momentum, they may bid up long-duration bonds as a growth hedge, pulling 10-year and 30-year yields lower even as the 2-year moves up in lockstep with the Fed funds rate. This creates a steeper curve through an unusual mechanism: falling long rates rather than rising short rates.

Bull steepening represents a significant departure from the conventional wisdom guiding most portfolio positioning in the current cycle. The majority of macro traders have leaned into bear-flattening trades — shorting long-duration bonds on the view that inflation persistence and Fed hawkishness would keep the long end of the curve under sustained pressure. Major's counter-view implies that such trades could face sharp forced unwinds if growth expectations deteriorate faster than inflation concerns ease. The 2s10s spread — a widely watched recession indicator — would actually widen in a bull steepening scenario, flashing a distinct macro signal from the flat or inverted curve that has defined recent market anxiety.

For investors, the bull steepening thesis creates specific tactical opportunities. Long-duration Treasury and sovereign bond positions may outperform if the Fed's hiking cycle proves growth-negative faster than expected. Equity sectors with long-duration characteristics — utilities, real estate investment trusts, and high-multiple growth technology companies — could benefit from falling long-term discount rates even within an overall rate-hiking environment. Traders will use the 10-year yield's immediate reaction post-decision as the first empirical data point to distinguish between the bull steepening and bear-flattening scenarios. A falling 10-year yield alongside a rising 2-year would strongly validate Major's thesis.

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