LEX Do you know your bull steepeners from your bear flatteners? These terms are part of the lexicon of gobbledygook that fixed-income investors use to explain government bond markets. While confusing, they are not a bad way of trying to work out what is going on these days. Why, for example, is the US yield curve so steep now, and what does this say about the broader economy?
Consider the curve’s current profile. Yields on the shortest duration Treasury bills are close to zero and have been negligible for more than a year. Five-year notes pay about 2 per cent interest per annum and 10-year notes a tad over 3 per cent. Thirty-year bonds yield 4.2 per cent. That long-end is hardly exceptional; in the early 1990s yields were pushing double digits. Rather, the yield curve is steep because short rates have plummeted. A year ago the spread between two-year and 30-year Treasuries was 104 basis points. Now it is over 300bp.
