Bear Steepener A widening yield curve that happens when long-term interest rates increase at a faster pace than short-term interest rates. Bear steepeners occur when investors are pessimistic about stock prices over the short-term, and may not expect inflation over the long-term.
What causes bear flattener?
Key Takeaways. Bear flattener refers to the convergence of interest rates along the yield curve as short term rates rise faster than long term rates and is seen as a harbinger of an economic contraction.
What is bull Steepener?
Key Takeaways. A bull steepener is a shift in the yield curve caused by falling interest rates—rising bond prices—hence the term “bull.” The short-end of the yield curve (which is typically driven by the fed funds rate) falls faster than the long-end, steepening the yield curve.
What does Steepener mean?
A steepener note (or steepener) is a complicated financial instrument that allows investors to speculate on the shape of the interest rate curve and profit if it steepens rather than remaining flat. Steepeners involve considerable risk and are only appropriate for investors seeking such risk.
What is bull flattening?
A bull flattener is a yield-rate environment in which long-term rates are decreasing more quickly than short-term rates. In the short term, a bull flattener is a bullish sign that is usually followed by higher stock prices and economic prosperity.
What Causes Bear Steepener?
A bear steepener occurs when there's a larger spread or difference between short-term bond rates and long-term bond rates–as long as it's due to long-term rates rising faster than short-term rates. U.S. Treasuries are typically used by investors to gauge whether interest rates are rising or falling.
What is a 2s10s flattener?
strategy geared towards a reduction in the 2y/10y yield differential. Explanation: A "flattener" is a trade designed to benefit from a flattening of the yield curve, i.e. a reduction in the difference between short-term and long-term yields (see the recent discussion of a "steepener", which is the opposite strategy).
What is a Treasury Steepener?
A steepening yield curve indicates that investors expect stronger economic growth and higher inflation, leading to higher interest rates. The curve steepener trade involves an investor buying short-term Treasuries and shorting longer-term Treasuries.
Is a steep yield curve good?
“The steeper the curve, the greater the difference in yield, and the more likely an investor is willing to accept that risk. As the curve flattens investors receive less compensation for investing in long-term bonds relative to short-term and are less inclined to do so.”
What happens when yield curve flattens?
Yields move inversely to prices. A steepening curve typically signals expectations of stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean the opposite: investors expect rate hikes in the near term and have lost confidence in the economy's growth outlook.
What is bear flattening?
A situation in which the yield curve for bonds is flattening. That is, short-term interest rates on bonds rise more rapidly than long-term rates so that the two begin to converge, resulting in a flat (or flatter) yield curve when it is plotted on a graph.
What is dvo1?
Dollar duration or DV01 is the change in price in dollars, not in percentage. It gives the dollar variation in a bond's value per unit change in the yield. It is often measured per 1 basis point - DV01 is short for "dollar value of an 01" (or 1 basis point).
What is a conditional Steepener?
Conditional Bull Steepeners have a pickup to forwards for the front leg being 3y or shorter Conditional Bull Flatteners have a pickup to forwards or are flat to forwards for the front leg being longer than 5y.
What is a flattener trade?
One active trading strategy to take advantage of this scenario is to engage in what is referred to as a “flattening trade”. Under this strategy, the trader or portfolio manager would short sell the 10-year treasury and simultaneously buy long the 30-year bond.
What does it mean for risk when the yield curve is inverted?
A yield curve illustrates the interest rates on bonds of increasing maturities. An inverted yield curve occurs when short-term debt instruments carry higher yields than long-term instruments of the same credit risk profile.
What does inverted yield curve indicate?
An inverted yield curve means that a short-term U.S. treasury is paying a higher interest rate than long-term U.S. treasuries. The inverted yield curve was first coined as a recession indicator by financial economist Campbell Harvey of Duke University in 1986.
Is the yield curve?
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
Why is the yield curve called a bear flattener?
It is called a bear flattener because this change in the yield curve often precedes the Fed raising short term interest rates, which is bearish for both the economy and the stock market. Here is an example of a bear flattener:
Why is the Fed calling it a bull flattener?
It is called a bull flattener because this change in the yield curve often precedes the Fed lowering short term interest rates, which is bullish for both the economy and the stock market. (For more on how the Fed changes interest rates go here .) Here is an example of a bull flattener:
Why is the yield curve flat?
This can often happen because of a flight to safety trade and/or a lowering of inflation expectations. It is called a bull flattener because this change in the yield curve often precedes the Fed lowering short term interest rates, which is bullish for both the economy and the stock market. (For more on how the Fed changes interest rates go here .)
What is rolling down the yield curve?
Rolling down the yield curve is a strategy where investors purchase longer term bonds and then sell them after a certain period of time to profit from the capital appreciation that naturally happens as the bond moves towards maturity. You can read more about this strategy here and here.
When traders expect the yield curve to steepen, they will go long short-term bonds and short long-term bonds?
When traders expect the yield curve to steepen they will go long short-term bonds and short long-term bonds. As the difference between short and long term interest rates widens, the trader should earn more on the short-term bonds they bought than he loses on the long-term bonds they sold short.
Why do you use Treasury Bond Futures?
Generally treasury bond futures are used in both these strategies because it is easier to go short and you have access to greater leverage in the treasury futures market. The most popular contracts used for these trades are the 2 or 5 year treasury on the short end of the yield curve and 10 year treasury futures on the long end. If you are interested in reading more about this strategy go here.
What is a bull steepener?
Bull Steepener. When short term interest rates fall faster than long term interest rates. This often happens when the Fed is expected to lower interest rates, a bullish sign for both the economy and stocks. Here is an example of a Bull Steepener:
What Is a Bull Steepener?
A bull steepener is a change in the yield curve caused by short-term interest rates falling faster than long-term rates, resulting in a higher spread between the two rates. A bull steepener can be contrasted with a bull flattener or bear steepener .
What does it mean when a yield curve is a bull steepener?
When the yield curve is said to be a bull steepener, it means that the higher spread is caused by the short-term rates, not long-term rates.
What is the opposite of a bull flattener?
A bull flattener is the opposite of a steepener —a situation of rising bond prices which causes the long-end to fall faster than the short-end. Bear steepeners and flatteners are caused by falling bond prices across the curve.
How does a steepener differ from a flattener?
A steepener differs from a flattener in that a steepener widens the yield curve while a flattener causes long-term and short-term rates to move closer together. A steepening yield curve can either be a bear steepener or a bull steepener.
What causes the long end of the yield curve to fall faster?
The long-end of the yield curve is driven by a myriad of factors, including—economic growth expectations, inflation expectations, and supply and demand of longer-maturity Treasury securities, among others. A bull flattener is the opposite of a steepener—a situation of rising bond prices which causes the long-end to fall faster than the short-end.
What happens when the yield curve flattens?
When the shape of the curve flattens, this means the spread between long-term rates and short-term rates is narrowing. This tends to occur when short-term interest rates are rising faster than long-term yields, or put it another way, when long-term rates are decreasing faster than short-term interest rates.
What is yield curve?
The yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. Typically made in reference to U.S. Treasury securities, the yield curve shows the yields of bonds with maturities ranging from 3 months to 30 years. 1 In a normal interest rate environment, the curve slopes upward from left to right. This shows that bonds with short-term maturities have lower yields than bonds with long-term maturities.
What Does Bear Flattener Mean?
Bear flattener refers to the convergence of interest rates along the yield curve as short term rates rise faster than long term rates and is seen as a harbinger of an economic contraction.
What happens when interest rates rise?
The changes in the short- or long-term interest rates trigger either a steepening or a flattening of the yield curve. Steepening occurs when the difference between short- and long-term yields increases. This tends to occur when interest rates on long-term bonds are rising faster than short-term bond rates. If the curve is flattening, the spread between long- and short-term rates is narrowing.
What causes the yield curve to flatten?
A bear flattener causes the yield curve to flatten as short-term rates start to ratchet higher in anticipation of the Federal Reserve (FED) embarking on a tightening monetary policy. The yield curve is a representation on a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. The maturity cycles range from three months to 30 years.
What causes a bear flattener?
A bear flattener causes the yield curve to flatten as short-term rates start to ratchet higher in anticipation of the Federal Reserve (FED) embarking on a tightening monetary policy. Bear flattener is seen as a negative for the stock market.
What is a steepening curve?
If the curve is flattening, the spread between long- and short-term rates is narrowing. A flattener may either be a bull flattener or a bear flattener.
Why does the yield curve rise?
Pointedly, the curve rises when the FED is expected to raise rates, and it falls when interest rates are likely to be slashed. The long end of the yield curve is influenced by factors such as the outlook on inflation, investor demand, and economic growth. The changes in the short- or long-term interest rates trigger either a steepening ...
What is a bull flattener?
A bull flattener is observed when long-term rates are decreasing at a rate faster than short-term rates. The change in the yield curve often precedes the FED lowering short-term interest rates, which usually signals that they want to stimulate the economy and is a positive for the stock markets.
What Is a Curve Steepener Trade?
A curve steepener trade is a strategy that uses derivatives to benefit from escalating yield differences that occur as a result of increases in the yield curve between two Treasury bonds of different maturities. This strategy can be effective in certain macroeconomic scenarios in which the price of the longer-term Treasury is driven down.
What does it mean when a yield curve is inverted?
Sometimes, the yield curve may be inverted or negative, meaning that short-term Treasury yields are higher than long-term yields. When there is little or no difference between the short-term and long-term yields, a flat curve ensues.
What is yield curve?
The yield curve is a graph showing the bond yields of various maturities ranging from 3-month T-bills to 30-year T-bonds. The graph is plotted with interest rates on the y-axis and the increasing time durations on the x-axis. Since short-term bonds typically have lower yields than longer-term bonds, the curve slopes upwards from the bottom left to the right. This is a normal or positive yield curve.
What is a steepening yield curve?
A steepening yield curve indicates that investors expect stronger economic growth and higher inflation, leading to higher interest rates. Traders and investors can, therefore, take advantage of the steepening curve by entering into a strategy known as the curve steepener trade. The curve steepener trade involves an investor buying short-term Treasuries and shorting longer-term Treasuries. The strategy uses derivatives to hedge against a widening yield curve. For example, an individual could employ a curve steepener trade by using derivatives to buy five-year Treasuries and short 10-year Treasuries.
What would happen if the Fed used a curve steepener trade?
One macroeconomic scenario in which using a curve steepener trade could be beneficial would be if the Fed decides to significantly lower the interest rate , which could weaken the U.S. dollar and cause foreign central banks to stop buying the longer-term Treasury.
What happens when the yield curve steepens?
If the yield curve steepens, this means that the spread between long- and short-term interest rates increases. In other words, the yields on long-term bonds are rising faster than yields on short-term bonds, or short-term bond yields are falling as long-term bond yields are rising.
Who is Gordon Scott?
Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the Investopedia Financial Review Board and the co-author of Investing to Win. Gordon is a Chartered Market Technician (CMT). He is also a member of CMT Association.
