But this presents a palpable (and likely underappreciated) set of concerns. The buildup in duration and the perpetuation of the bond trade more generally creates an ever larger tail risk. What you have to ask yourself is where the bid for the long end is going to come from when the U.S. finally does enter a recession against a backdrop where America’s fiscal position has ventured into uncharted territory and the dollar suddenly loses support from a Fed that will be forced to cut rates to counter the downturn. Here’s Deutsche Bank’s Aleksandar Kocic, from a note out Friday:

In contrast, in the current cycle, the main driver of the flattening trend is essentially the strong USD – as long as the currency remains stable, the sponsorship for the US long end is likely to be uncontested. This becomes problematic when the USD begins to weaken significantly and that can come on the back of either higher inflation or possible recession or a general weakening of the economy. Fed hikes in this case act as a stabilizer – rate hikes are both supportive for currency and potentially prevent higher inflation.

Nevertheless, persistence of the current trend is a cause of buildup of tail risk. As we are expecting a continuing fiscal easing and deficit spending in the future in the environment of economic expansion, when the recession kicks in, Fed would have to cut rates. The logical question is: who will sponsor the long end of the US curve in an economy with potentially weaker currency? Long yields would likely fail to rally or could even sell off in an easing cycle. The persistence of Fed hikes and curve flattening could become an incubator for vicious steepeners in the future.

See what I mean? The current environment is conducive to the continual sponsorship of the U.S. long end as Fed hikes are supportive of the dollar even against the deteriorating fiscal outlook. Those same hikes serve as a check on inflation. This could encourage crowded positioning (i.e., the buildup of tail risk) which in turn raises the stakes further in the event the economy finally falters, forcing the Fed to cut rates, thereby allowing inflation to materialize and potentially undercutting the currency against a backdrop where the fiscal picture is the worst it’s ever been.

In that scenario, the bid for the long end of the U.S. curve may evaporate completely, leading to dramatic steepening and opening the door for a supercharged version of the spike in cross-asset volatility we saw in early February during the brief inflation scare that accompanied the above-consensus AHE print in the January jobs report.

Readers are always asking me for trade ideas and while I’m not going to try and time any of the above for you or suggest how you should play it (it would be impossible for me to do the latter without knowing what kind of access/tools you have at your disposal), I would note that if you’re looking for a tail risk and/or a potential black swan, there it is. It’s possible that the seemingly inexorable grind flatter in the U.S. curve could be acting as, to quote Kocic, an “incubator” for vicious steepeners down the road.

 Related: Here’s Why You Shouldn’t Worry About Treasury Yields