Investors are eagerly jumping into the "higher for longer" trade, prepared for interest rates to remain elevated in the long run, while others remain wary over the pain this could cause in case of an economic slowdown. "The bond market is now testing the hypothesis that the economy can handle higher rates," The Macro Compass Founder Alfonso Peccatiello tells Yahoo Finance from the New York Stock Exchange.

"When long-end rates go higher while nominal growth is slowing down late in the cycle, it's a very dangerous cocktail for risk assets," Peccatiello states, while also commenting on historical rally trends investors should be attentive to.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

- Well, the rip higher in US Treasury yields is reverberating throughout the bond and equity markets. We just described one way that it is doing that. Investors are piling into the higher for longer trade. But is the street piling into a lopsided trade, once again, only to face a rug pull when the rubber meets the road. Yahoo Finance's Jared Blikre live from the floor of the New York Stock Exchange behind us, with a special guest. Hey, Jared.

JARED BLIKRE: Hey there, Julie. I am here with Alfonso Peccatiello, proprietor and founder of the Macro Compass. And we've been talking about the bond market. You're in New York for a couple of days, really glad you're here. Do a lot of investor education. But we've had some disruptions in the bond market, utilities just had their worst day since the pandemic. Is it really the worst time since pandemic? What's going on for us.

ALFONSO PECCATIELLO: Well, I think the bond market is now testing this hypothesis Jared, that the economy can handle higher interest rates, right? That's what they heard by the Fed. They revised their dot plot higher. They're trying to force the tightening and this higher for longer. And the bond market is going after it exactly as they did in late 2018, in late 2007, and in late 2000.

When this bear steepening, when long end rates go higher, while nominal growth is slowing down late in the cycle, it's a very dangerous cocktail for risk assets, so we are getting a bit more nervousness priced in markets today.

JARED BLIKRE: Does history provide any guide? What can a retail investor expect. Does it get worse before it gets better? How long do these episodes tend to last.

ALFONSO PECCATIELLO: So generally this late cycle bear steepening tends to last anywhere between six and 10 weeks. And right now we've been going on for almost 10 already. So it's been a prolonged and very intense bear steepening, late cycle, as the economy is slowing down. History says the following. When this happens, and it used to happen in September 2018 last time, and in the last innings of 2007, it generally takes a few months until risk assets really crack badly.

And it could be credit markets freezing like at the end of 2018, or it could be a disaster like the great financial crisis or somewhere in the middle. But the sequence is, bear steepening, pain gets priced through in equity and credit markets, and only after the pain has become acute, bond markets can rally. But this time the main difference is, inflation is at 4%. So can the Federal Reserve easily come in and rescue markets like they did in the end of 2018? I really doubt so.