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Bull Flattener

Bull Flattener
InvestingBondsFixed IncomeFixed Income Essentials

What Is a Bull Flattener?

A bull flattener is a yield-rate environment in which long-term rates are decreasing more rapidly than short-term rates. That causes the yield curve to level as the short-run and long-run rates begin to unite.

How a Bull Flattener Works

The yield curve is a graph that plots the yields of comparative quality bonds against their maturities, going from shortest to longest. Yield curves are regularly developed utilizing U.S. Treasury securities. The yield curve shows the yields of bonds with maturities going from one month to 30 years. In a normal interest rate environment, the curve slants up from left to right. Bonds with short-term maturities typically have lower yields than bonds with long-term maturities since they have lower interest rate risk.

Various factors influence the short and long finishes of the yield curve. The short finish of the yield curve in light of short-term interest rates is determined by expectations of the Federal Reserve policy concerning rates. The short end rises when the Fed is expected to raise rates and falls when investors expect interest rate cuts. The long finish of the yield curve is influenced by factors, for example, the inflation outlook, investor demand, the federal budget deficit, and anticipated economic growth.

The yield curve can steepen or straighten. When the yield curve steepens, the spread between the short-term and long-term interest rates augments, causing the curve to seem more extreme. A flattening yield curve, then again, happens when the spread between long-term and short-term interest rates on bonds diminishes. A flattener can either be a bear flattener or a bull flattener.

In a bull flattener, long-term interest rates fall quicker than short-term interest rates, making the yield curve compliment. At the point when the yield curve straightens because of short-term interest rates rising more rapidly than long-term interest rates, it is a bear flattener. This change in the yield curve frequently goes before the Fed raising short-term interest rates, which is bearish for both the economy and the stock market.

Benefits of a Bull Flattener

A bull flattener is viewed as a bullish indicator for the economy. It could show that investors anticipate that inflation should fall in the long term, leading to nearly bring down long-term rates. Assuming that the prediction of lower long-term inflation works out, the Fed has more room to bring down short-term interest rates. At the point when the Fed brings down short-term rates, it is generally thought to be bullish for both the economy and the stock market. A bull flattener could likewise happen as additional investors pick long-term bonds relative to short-term bonds, which drives long-term bond prices up and decreases yields.

A bull flattener is for the most part, yet not generally, trailed by gains in the stock market and growth in the economy.

Drawbacks of a Bull Flattener

While a bull flattener is typically bullish for the greater part of the economy in the short-term, the long-term effects are very unique. A bull flattener is much of the time driven by falling interest rates, which straightforwardly increase bond prices and returns in the short run. Be that as it may, higher bond prices mean lower yields and lower returns for bonds from now on. It is definitively those lower anticipated returns for bonds that drive investors into the stock market. That raises stock prices in the short term, however higher stock prices mean lower dividend yields and lower returns for stocks over the long haul.

A bull flattener might in fact happen on the grounds that expected long-term growth, as opposed to inflation, declined. Nonetheless, that is rare in light of the fact that economic growth is considerably more stable and unsurprising than inflation.

Illustration of a Bull Flattener

At the point when the yields on long-dated bonds fall more rapidly than interest rates on short-term bonds, interest rates begin to unite in a normal rate environment. The convergence, thusly, straightens the yield curve when plotted on a graph. Assume that two-year Treasuries yield 2.07%, and ten-year Treasuries yield 2.85% on February 9. On March 10, two-year Treasuries yield 2.05%, while ten-year Treasuries yield 2.35%. The difference went from 78 basis points to 30 basis points, so the yield curve straightened. The straightening happened in light of the fact that the long end, the ten-year Treasury, fell by 50 basis points compared to the decline of 2 basis points in the short end, the two-year Treasury. Long-term rates declined quicker than short-term rates, so it was a bull flattener.

Features

  • In the short term, a bull flattener is a bullish sign that is generally trailed by higher stock prices and economic success.
  • A bull flattener is a yield-rate environment in which long-term rates are decreasing more rapidly than short-term rates.
  • Over the long haul, a bull flattener frequently prompts lower returns for bonds and stocks.