The famous yield curve: buy or sell signal? You decide…

Here’s a warning:

My colleague Greg Canavan thinks we’re in a budding bear market.

I don’t.

In fact, I see a lot of reasons why markets can keep climbing the fabled wall of worry.

Today’s piece will explain, in part, as to why.

Of course, we all want to know how likely a “hard” landing is in Australia or another dump in the stock market.

One way is to watch what the banks and financial firms are doing.

The Australian Bureau of Statistics can help with that. Their quarterly lending data came out this week.

Credit is up over the year.

That’s a good sign. The economy should continue to expand while this goes on.

Lower interest rates – whether 5, 4, 3 or 2 cuts – will likely keep this humming along.

What else can we see?

Pepper Money ($PPM) is a non bank lender. They just had their Annual General Meeting.

They shared this chart, below....

Credit demand is tracking higher in 2025 than previous years…at least, so far.

Most of this credit is mortgage debt.

We can expect house prices to respond…by going higher…as all the lenders respond in the same way.

Then we have the fuel to the flame as the Labor government juices first home buyers to get into the action via 5% deposits.

And the wider backdrop will give them a further push.

Property developer Tim Gurner warns the public [CN1] that Australia faces a 15 year rental crisis.

There is, he says, record demand from immigration at the same time supply has never looked worse.

He may or may not be right in the long run.

But if it enough people believe it, they will act on it – and plough borrowed money into the housing market.

There’s another handy point thanks to the Pepper crew…

The CEO says most of the lending demand is coming from the “Prime” segment.

That’s solid income earners with stable jobs and verifiable budgets.

If that’s true across the industry, that’s a solid basis for the next lift in the housing market.

Banks should be keen to lend.

One bank cited in the Australian Financial Review actually complained it has too many deposits and not enough loans!

That’s hardly the thing you’d expect to hear if the economy was overheating, with wild speculation going on.

We may get to that environment down the track.

Jonathan Shapiro writes today that yield curves are steepening around the world, and that could be a sell signal.

I’m not sure I go along with that. Markets can’t be reduced to one factor, for starters.

And, remember, it was only a few years ago everyone was worried about an inverted yield curve portending a US recession…that never happened.

Now we’re supposed to worry about a ‘normal’ yield curve? I’m confused.

The other thing is that - as I understand, anyway – a steepening yield curve makes banks more profitable.

After all, the whole game is to borrow short to lend long. A steeper curve means they have a higher incentive to push out further credit. That’s generally bullish.

Perhaps that’s part of why CBA shares continue to defy the lower price targets and short sellers?

That’s speculation on my part. But Matt Comyn does seem keen to expand CBA lending, too.

For you and me, there looks to be good value in these smaller financial firms like Pepper, Australian Finance Group ($AFG) and others.

Here’s Forager Funds on two that they like…

“…quarterly reports from lenders Plenti (PLT) and Wisr (WZR) were upbeat. Both are growing their customer bases. Bad debts are well under control.

“And loan books are now growing for both businesses. As loan books and revenue increase, the team expects only small increases in both companies’ overheads, driving further rapid increases in profits.”

Again, to the broader point at the start of today’s missive, none of this sounds like an impending recession for Australia.

Of course, keep the usual risks in mind. Maybe Greg is right and a bear market is looming. Perhaps the yield curve – or something else – upends markets.

That said, to me…

Domestic names that can surf some renewed consumer strength and an expansion in credit look very reasonable propositions.

Best,

Callum Newman,

Fat Tail Daily