Fed Meeting Sparks Yield Curve Steepening as S&P 500 Enters Danger Zone

A very strange post-meeting reaction from the market following Wednesday’s Fed meeting. The front end of the Treasury curve rallied sharply, with September rate hike expectations largely priced out of the swaps market. At the same time, the long end of the curve sold off aggressively. The spread between the 30-year Treasury yield and the 3-month Treasury bill widened by roughly 20 basis points on the day to 1.43%—a massive steepening move.

The interesting takeaway from today’s meeting is that the long end of the Treasury curve clearly got the message: the Fed is not going to stand in its way. Warsh acknowledged that both nominal and real yields have risen sharply since the June meeting, suggesting the Fed is watching the market and recognizing that financial conditions have already tightened significantly.

That is important because it allows the Fed to avoid raising the policy rate further. In effect, the market is doing the tightening for the Fed, and that is ultimately what matters. If the Fed is no longer relying on forward guidance and is instead allowing the market to dictate the narrative, then long-term interest rates can adjust to levels that appropriately compensate investors for inflation while allowing the yield curve to steepen naturally.

The yield curve remains historically flat, and that has been one of the reasons Powell and his colleagues struggled to bring inflation back to target. Long-term interest rates were never allowed to rise sufficiently relative to short-term rates, preventing the yield curve from steepening in a way that would have produced more restrictive financial conditions.

In the meantime, the S&P 500 has entered the danger zone, closing at 7,315. The options put wall sits at 7,300, a level that could provide support if it holds. That is where put holders may choose to monetize their positions and unwind hedges, potentially helping to stabilize the market. However, a break of support does open the gates to significantly lower levels.

The market has also moved into negative gamma, meaning market maker hedging flows become directional and can amplify price swings. As a result, volatility is likely to increase, with market moves becoming larger in either direction.

Below that, technical support shows around 7,250 and 7,130.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

For institutional partners: research syndication, licensing, and bylined or white-labeled commentary for platforms, brokers, and publishers.

Inquire →

Glossary by ChatGPT

Financial conditions — The overall ease or difficulty of borrowing and investing, influenced by interest rates, credit spreads, equity prices, and the U.S. dollar.
Negative gamma — A market condition where dealer hedging activity tends to reinforce price moves, increasing market volatility.
Nominal yield — The stated yield on a bond before adjusting for inflation.
Options put wall — A price level with significant put option open interest that can act as potential market support due to hedging activity.
Policy rate — The benchmark short-term interest rate set by a central bank to influence economic activity and inflation.
Real yield — A bond yield adjusted for expected inflation, representing the inflation-adjusted return.
Swaps market — The market where participants trade interest rate swaps, often used to infer expectations for future central bank policy.
Treasury curve — The relationship between U.S. Treasury yields across different maturities.
Yield curve steepening — A widening gap between long-term and short-term interest rates, typically driven by rising long-term yields, falling short-term yields, or both.

Disclosure

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.