Q. We’re focused a lot on the bond market lately for obvious reasons… We talked about “Bear Flattener” the other day, so how does this compare?
A. A “bear flattener” is a change in the shape of the yield curve, where it flattens out because short term rates are rising, but the long end is staying put. Rising rates are usually bad for the economy, hence the name. We also talked about a “bull flattener”, where the yield curve flattens because the long end comes down, while short term rates stay put. That, of course, is bullish because of falling rates.
Q. OK, so much with the “flatteners”. Today we’ve going to the “steepeners”. And we have two graphs to show how these work.
A. So as you can readily guess, the “steepeners” are exactly opposite the flatteners. A bear steepener occurs when the long end of the yield curve goes up, while short term rates are stable. The yield curve gets steeper because of rising rates, generally bad for the economy.
Q. Alright, and now lets go to the Bull Steepener.
A. Here it is. A bull steepener, on the other hand, would arise if short term rates drop while long ones stay the same. Same result, a steeper curve, but for positive rahtner than negative reasons.
Q. But these days we’re seeing the bear flattener and bear steepener patterns more and more.
A. Right. The market is absolutely projecting higher rates, some days more at the short end of the curve and some days at the longer end. Obviously that has major implications for stock market volatility… the Fed totally dominating the market, and every sneeze from Bernanke is worth a point or two in either direction.