Interest rate yield curve dynamics
Bull steepening, bull flattening, bear steepening, bear flattening
In this article, I shall discuss the four standard yield curve dynamics:
Bull steepening
Bull flattening
Bear steepening
Bear flattening
Bull vs bear markets
When referring to the interest rate markets, a bull market is describing a market where interest rates decrease and a bear market is describing a market where interest rates increase.
This may seem counterintuitive. However, this is because the markets are expressed in the view of being a bond holder. If the market buys bonds (i.e., a bull market), then the yield of bonds decrease. If the market sells bonds (i.e. a bear market), then the yield of bonds increase.
Curve steepening vs flattening
The interest rate yield curve can usually quantified by taking differences between long-end and short-end yields. For example:
2s10s = 10y - 2y
5s30s = 30y - 5y
This describes how steep or flat the curve is.
If the 2s10s increases, then the 2s10s yield curve is steepening. If the 2s10s decreases, then the 2s10s yield curve is flattening.
Yield curve scenarios
What do the following four scenarios actually mean?
Bull steepening
Bull flattening
Bear steepening
Bear flattening
1. Bull steepening: Rates decrease and the yield curve steepens
Suppose the 2y rate decreases by 5bps and the 10y rate decreases by 2bps. This means the 2s10s has increased by 3bps.
The short-end of the curve has rallied more than the long-end and so the curve has bull steepened.
2. Bear steepening: Rates increase and the yield curve steepens
Suppose the 2y rate increases by 2bps and the 10y rate increases 5bps. This means teh 2s10s has increased 3bps.
The long-end of the curve has sold off more than the short-end and so the curve has bear steepened.
3. Bull flattening: Rates decrease and the yield curve flattens
Suppose the 2y rate decreases 2bps and the 10y rate decreases 5bps. This means the 2s10s has decreased 3bps.
The long end of the curve has rallied more than the short-end and so the curve has bull flattened.
4. Bear flattening: Rates increase and the yield curve flattens
Suppose the 2y rate increases 5bps and the 10y rate increases 2bps. This means 2s10s has decreased 3bps.
The short-end of the curve has sold off more than the long-end and so the curve has bear flattened.
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