Bear Flattener

What Does Bear Flattener Mean?

Bear flattener alludes to the convergence of interest rates along the yield curve as short term rates rise quicker than long term rates and is viewed as a harbinger of an economic contraction.

Grasping Bear Flattener

A bear flattener causes the yield curve to straighten as short-term rates begin to ratchet higher in anticipation of the Federal Reserve (FED) leaving on a tightening monetary policy. The yield curve is a representation on a graph that plots the yields of comparable quality bonds against their maturities, going from shortest to longest. The maturity cycles range from 90 days to 30 years.

In a normal interest rate environment, the curve slants up, from left to right, demonstrating a normal yield curve, in which bonds with short-term maturities produce lower yields than bonds with long-term maturities. The short finish of the yield curve in light of short-term interest rates is affected by expected FED policy changes. Distinctly, the curve rises when the FED is expected to raise rates, and it falls when interest rates are probably going to be cut. The long finish of the yield curve is affected by factors, for example, the outlook on inflation, investor demand, and economic growth.

The changes in the short-or long-term interest rates trigger either a steepening or a smoothing of the yield curve. Steepening happens when the difference among short-and long-term yields increases. This will in general happen when interest rates on long-term bonds are rising quicker than short-term bond rates. In the event that the curve is flattening, the spread among long-and short-term rates is restricting.

A flattener may either be a bull flattener or a bear flattener. A bull flattener is seen when long-term rates are decreasing at a rate quicker than short-term rates. The change in the yield curve frequently goes before the FED bringing down short-term interest rates, which normally flags that they need to invigorate the economy and is a positive for the stock markets.

On the other hand, when short-term rates are rising more quickly than long-term rates, a bear flattener before long follows and is viewed as a negative for the stock market. Regularly, short-term rates rise when the market anticipates that the FED should begin tightening to contain the prospering powers of inflation. For instance, on Feb. 9, 2018, the yield on a three-month T-bill was 1.55%, and the yield on a seven-year note was 2.72%. The spread during this time was 117 basis points (2.72%-1.55%.) By April 2, the three-month bill yield spiked to 1.77%, while the seven-year note yields unassumingly moved to 2.67%. The more modest spread of 90 basis points provoked a compliment yield curve.

Bond investors endeavor to profit from changes in interest rates and vacillations looking like yield curves.

Generally talking, a leveling out hump flags a bearish economy, likely stirring up a lot of impairment for banks, as their funding costs increase. Besides, the higher interest rates on short-term bonds will generally create higher returns than stocks. Rising rates push down short-term bond prices, which quickly increases their yields in the short term, relative to long-term securities. In such an economic climate, investors extensively sell off their stocks and reinvest the proceeds in the bond market.

Features

• A bear flattener causes the yield curve to smooth as short-term rates begin to ratchet higher in anticipation of the Federal Reserve (FED) setting out on a tightening monetary policy.
• Bear flattener alludes to the convergence of interest rates along the yield curve as short term rates rise quicker than long term rates and is viewed as a harbinger of an economic contraction.
• Bear flattener is viewed as a negative for the stock market.