Global Yield Curve Steepening Supports Growth

The UK joined this year’s global rate hike party by raising its Bank Rate a quarter point last week. Australia also hiked—the fifth this year. These moves add to others in Europe, Japan and North America, leading many to expect worsening credit conditions. We see these hikes as mistakes outside Japan. But the global yield curve remains steep enough to support lending anyway—a key consideration when weighing monetary policy moves.

Central bank rate hikes aren’t automatically bad for global stocks or the economy. They don’t reflect tighter financial conditions on their own. The yield curve—issuers’ borrowing costs from short to long maturities—does. Especially sovereign yield curves, which serve as reference rates for loans of many types. Banks borrow short term to fund longer-term loans. So when long rates (think: 10-year yields) globally top short (overnight or 3-month), banks’ new loans are typically profitable. The steeper the yield curve, the more money they make lending, incentivizing loan growth—and looser credit. However, if short rates top long, “inverting” the yield curve—say, from excessive central bank hiking—credit could contract as banks’ funding costs exceed potential new loans’ revenues.

Positively, the global yield curve is still steep. Despite alleged central bank “tightening,” long rates globally remain higher than short. Moreover, as Exhibit 1 shows, the developed world’s GDP-weighted yield curve isn’t only positively sloped, but getting steeper—financial conditions are becoming more accommodative. This is an unheralded silver lining to this year’s bond market volatility.

Exhibit 1: Global Yield Curves Steepening

Source: FactSet, as of 11/10/2026. Global GDP-weighted yield spread (10-year minus 3-month government yields), 12/31/1989 – 9/30/2026.

Zoom in on the UK. The Bank of England (BoE) hiked its overnight Bank Rate a quarter point to 4.0% last Thursday. This was its first since 2023, but it follows the Fed, ECB, Bank of Japan, Bank of Canada and Reserve Bank of Australia (RBA). That indicates to many a global “tightening” cycle is afoot. The stated reason for all: supposed energy-driven inflation. But we think this is mistaken. Inflation is caused by too much money chasing too few goods and services. Absent galloping money supply growth, higher energy prices depress prices elsewhere. With aggregate global money supply expanding below average historically, prices seem to lack the fuel to run away economywide.

Regardless, with 5.1% 10-year Gilt yields serving as the reference rate for many long-term loans, British banks’ net interest margins keep generating positive cashflow.^[i] Through September, UK bank lending rose 6.3% y/y, just above the global 6.2% average.^[ii] Lending to small and medium businesses rose 5.7% y/y, the fastest since COVID’s emergency loan boom.^[iii] Banks are signaling heathy risk appetite. This could change if BoE hiking continues, but cooling energy prices in recent weeks may stay its hand, which would be a positive (if inadvertent) outcome.

Rate hikes Down Under look closer to a tipping point. The RBA’s quarter point hike last Tuesday took its Cash Rate Target to 4.85%, just under 10-year Australian government bond yields’ 5.0%.^[iv] Hikes have substantially flattened the Aussie yield curve. (Exhibit 2) Of course, banks generally lend above that benchmark, as it is a credit-risk-free reference rate. No private borrower is credit-risk free, naturally, so banks add a spread. Still, that suggests banks may not be adequately compensated for risk when making new loans to a wide swath of borrowers. More hikes could dissuade further lending.

Exhibit 2: Flattening Yield Curve Down Under Could Slow Credit

Source: FactSet, as of 11/10/2026. 10-year Australian government bond yield minus Cash Rate Target, 12/31/2003 – 11/9/2026.

Non-financial Australian credit is still growing, though, up 8.0% y/y in September.^[v] Indeed, year-over-year lending has grown continuously Down Under since at least 2004 despite bouts of yield curve inversion over the last two decades. (Exhibit 2) How could that be? Banks have access to global funding markets—they can borrow overseas. (And, worth noting, Australia’s huge mining sector and banks’ exposure to it helped the Lucky Country dodge recession in 2008, as vast Chinese infrastructure stimulus spilled to Aussie commodity firms.) One country’s yield curve matters less than the global yield curve.

With the global yield curve still positively sloped, credit extension likely continues. And as credit funds future economic activity, this points to ongoing global growth. Exhibit 3 shows the pace of lending globally has almost doubled from two years ago as the curve steepened. Now, if the RBA inverts its curve—and more central banks join in—risks could mount for global markets. That isn’t today. But it is worth monitoring.

Exhibit 3: Global Bank Loan Growth Accelerating

Source: FactSet, as of 11/10/2026. Global GDP-weighted loan growth, 12/31/1989 – 9/30/2026.