Bear Steepener

What Is a Bear Steepener?

A bear steepener is the enlarging of the yield curve brought about by long-term interest rates expanding at a quicker rate than short-term rates. A bear steepener is generally suggestive of rising inflationary expectations-or a widespread rise in prices all through the economy. The rise in inflation can lead to the Federal Reserve expanding interest rates to slow prices from rising too quickly. Investors, thusly, sell their existing fixed-rate long-term bonds since those yields will be less alluring in a rising-rate environment. The outcome is a bear steepener in light of the fact that investors sell long-term bonds for shorter maturities as they hang tight for the rate hikes to complete before buying long-term bonds once more.

Grasping Bear Steepener

A bear steepener happens when there's a larger spread or difference between short-term bond rates and long-term bond rates-for however long it's due to long-term rates rising quicker than short-term rates. U.S. Treasuries are commonly utilized by investors to check whether interest rates are rising or falling. U.S. Treasuries are bonds-or debt instruments-gave by the U.S. Treasury to fund-raise for the U.S. government. Each bond regularly pays a rate of return-or yield.

The difference between the short-term and long-term rates of different bonds and their maturities is plotted out graphically in what's known as the yield curve. The short finish of the yield curve depends on short-term interest rates, which are determined by the market's expectations of Federal Reserve policy. Basically, it rises when the Fed is expected to raise interest rates and falls when interest rates are expected to be cut. The long finish of the yield curve is impacted by factors, for example, the outlook on inflation, investor demand and supply, economic growth, and institutional investors trading large blocks of fixed-income securities.

The Yield Curve and a Bear Steepener

The yield curve shows the yields of bonds with maturities going from 90 days to 30 years, by which U.S. Treasury securities are regularly utilized in the calculation. In a normal interest rate environment, the curve slants up from left to right, showing a normal yield curve. A normal yield curve is one in which bonds with short-term maturities have lower yields than bonds with long-term maturities.

At the point when the state of the curve flattens, it means that the spread between long-term rates and short-term rates is limiting. A flattening yield curve will in general happen when short-term interest rates are rising quicker than long-term yields, or to put another way, when long-term rates are decreasing quicker than short-term interest rates.

Then again, the yield curve steepens when the spread among short-and long-term yields broadens. On the off chance that the yield curve is steepening due to long-term rates rising quicker than short-term rates, it's called a bear steepener. The term got its name since it will in general be bearish for equity markets since rising long-term rates demonstrate inflation and future interest rate hikes by the Fed. At the point when the Fed hikes rates, the economy dials back, in part, due to higher loan and borrowing rates. The outcome can lead to investor selling of equities.

Special Considerations

Recollect that there is an inverse relationship between bond prices and yield, or at least, when prices go down, bond yields go up, and vice versa. A bond trader can exploit an enlarging spread brought about by a bear steepener by going long short-term bonds and shorting long-term bonds, making a net short position. As yields increase and the spread broadens, the trader would earn erring on the short-term bonds purchased than would be lost on the shorted long-term bonds.

Bear Steepener versus Bull Steepener

A steepening yield curve can either be a bull steepener or a bear steepener. A bull steepener is described by short-term rates falling quicker than long-term rates. The two terms are comparative and depict a steepening yield curve with the exception of that a bear steepener is driven by changes in long-term rates. On the other hand, a bull steepener is driven by falling short-term rates greaterly affecting the yield curve. A bull steepener got its name since it will in general be bullish for equity markets and the economy since it shows the Fed is cutting interest rates to support borrowing and animate the economy.

Illustration of a Bear Steepener

How about we check out at a model exhaustively. On November 20, 2019, the yield for the 10-year Treasury note was 1.73%, and the 2-year Treasury note yielded 1.56%. The spread between the two yields around then was 17 basis points (or 1.73% - 1.56%)- which could be portrayed as being somewhat flat.

Suppose two months after the fact, the bond yields for the two securities rose by which the 10-year was 2.73%, and the 2-year was 1.86%. The yield spread has now enlarged to 87 basis points (or 2.73% - 1.86%).

In any case, the difference between long-term yields is 100 basis points (2.73% - 1.73%), while the difference between short-term yields is 30 basis points (1.86% - 1.56%). As such, the event is a bear steepener since long-term rates increased by a greater amount than short term rates over a similar period.

Features

• Bear steepener usually happens when investors are worried about inflation or a bearish stock market in the short-term.
• Traders can exploit a bear steepener by going long (buying) short-term bonds and shorting (selling) long-term bonds.
• A bear steepener is the broadening of the yield curve brought about by long-term rates expanding at a quicker rate than short-term rates.