The yield curve is said to steepen when the spreads between short-term and long-term rates increases. The yield curve flattens when spreads shrink.

  • A bearish steepener occurs when rates are rising and long-term yields are rising more than short-term rates. Spreads widen.
  • A bullish steepener occurs when rates are falling and short-term rates are falling faster than long-term rates. Spreads widen.
  • A bullish flattener occurs when rates are falling and long-term rates are falling faster than short-term rates. Spreads narrow.
  • A bearish flattener occurs when rates are rising and short-term rates are rising faster than long-term rates. Spreads narrow.

The terms bearish and bullish refer to capital gains (bullish) or losses (bearish) if one is invested in government bonds.

Bearish Steepener Meaning

A bearish steepener is generally a sign that market participants believe the economy is getting stronger and the Fed (Central Bank), will be hiking rates faster than previously anticipated or more than anticipated.

What Happened Today?

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June Rate Hike Odds

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Synopsis

  • The Fed Funds rate is currently 1.25% to 1.50%
  • The odds of two quarter point hikes through the June meeting increased from 32.5% yesterday to 38.1% today. This is consistent with the bearish steepening of the yield curve.

I did not believe the Fed would hike as much as expected in 2018, and today does not change my mind.

Mike "Mish" Shedlock