A steep yield curve makes fixed annuities more attractive for consumers. Life insurers sell more of these products and invest the proceeds into spread assets like corporate bonds, creating a powerful, non-obvious demand driver for the credit markets.
Fed rate cuts primarily lower short-term yields. If long-term yields remain high or rise, this steepens the curve. Because mortgage rates track these longer yields, they can actually increase, creating a headwind for housing affordability despite an easing monetary policy.
When a steepening yield curve is caused by sticky long-term yields, overall borrowing costs remain high. This discourages companies from issuing new debt, and the reduced supply provides a powerful technical support that helps keep credit spreads tight, even amid macro uncertainty.