In 2026, major central banks will diverge significantly. The U.S. Fed and ECB are expected to cut rates in response to slowing growth and disinflation. In stark contrast, the Bank of Japan is poised to hike rates as it finally achieves reflation, making it the sole hawkish outlier among developed market central banks.

Recent steepening in the U.S. yield curve is not just due to domestic factors. Fiscal uncertainty in Japan is pushing Japanese Government Bond (JGB) yields higher, making U.S. Treasuries less attractive on a currency-hedged basis for global investors, thus pushing long-term U.S. yields up.

In the early stages of a Fed easing cycle, short-term rates fall while long-term rates remain sticky, causing the yield curve to steepen. The rally in long-dated bonds only occurs much later, after investors get comfortable with low rates and begin chasing carry trades.

The yield curve is poised to steepen, similar to the 1970s OPEC-1 shock. Markets anticipate the incoming Fed chair will be dovish, like Arthur Burns was, and avoid hiking short-term rates into a supply-driven inflation shock. This will cause long-term inflation expectations and yields to rise faster than short-term rates.

Jared Dillian posits the Fed's recent inaction on rates was a deliberate move. By allowing the long end of the bond market to sell off, they effectively tightened financial conditions (e.g., higher mortgage rates) while preserving the ability to cut short-term rates later, a contrarian view to the consensus that it was a policy error.

The Fed plans to align its balance sheet duration with the Treasury's by reducing its holdings of long-term bonds. This would steepen the yield curve by raising long-term rates (hurting mega-caps) while simultaneously cutting the Fed Funds rate to ease pressure on smaller businesses with floating-rate debt.

The Fed is prioritizing its labor market mandate over its inflation target. This "asymmetrically dovish" policy is expected to lead to stronger growth and higher inflation, biasing inflation expectations and long-end yields upward, causing the yield curve to steepen.

A surprisingly hawkish BOJ tone, with dissents for a rate hike, bolstered its policy normalization credibility. This stemmed bearish sentiment at the long end of the JGB curve, shifting rate hike pressure to the front end and creating a bias for the curve to flatten.

The Federal Reserve is executing an underappreciated policy of shortening its balance sheet duration. This supports short-term rates while pressuring long-term bonds, causing a yield curve steepening that creates a structural headwind for long-duration assets like crypto and high-growth technology stocks.