The Bond Market Knows Something the Fed Doesn’t Want to Admit

The 10-year Treasury yield crept to 4.06% yesterday while the 2-year jumped to 3.51% — and that 55 basis point spread tells a story about confidence that the Fed’s own projections might be missing. When the yield curve steepens this quietly, it’s usually because bond investors see growth ahead that central bankers aren’t pricing in yet.

Look past the headline noise about tariffs and government shutdowns. Corporate profits grew 9.2% annualized in Q4, and margins are still expanding despite all the policy uncertainty swirling around Washington. That’s the number that matters most for the next six months. When companies are making more money per dollar of sales, they invest more, hire more, and create the kind of self-reinforcing cycle that drives multiyear expansions.

The market’s defensive rotation over the past month — utilities up 12.4% versus the S&P 500, real estate up 8.3% — looks like classic late-cycle positioning. But here’s what that misses: we’re not in a late cycle. We’re in the middle of a capital-intensive productivity boom driven by AI investment, and those cycles run longer than traditional expansions. The 1990s taught us that when companies are rebuilding their entire operational infrastructure, the usual recession signals don’t apply.