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Bull Steepener

Bull Steepener
InvestingBondsFixed IncomeFixed Income Essentials

What Is a Bull Steepener?

A bull steepener is a change in the yield curve brought about by short-term interest rates falling quicker than long-term rates, bringing about a higher spread between the two rates. A bull steepener can be diverged from a bull flattener or bear steepener.

Figuring out Bull Steepeners

A bull steepener happens when the Fed Reserve is expected to bring down interest rates. This expectation makes consumers and investors become hopeful about the economy and bullish about prices in the stock market over a shorter period of time.

The yield curve is a graph that plots the yields of comparative quality bonds against their maturities, going from shortest to longest. Ordinarily made in reference to U.S. Treasury securities, the yield curve shows the yields of bonds with maturities going from 90 days to 30 years. In a normal interest rate environment, the curve slants up from left to right. This shows that bonds with short-term maturities have lower yields than bonds with long-term maturities.

The short finish of the yield curve in view of short-term interest rates is determined by expectations for the Federal Reserve policy, rising when the Fed is expected to raise rates and falling 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, institutional investors trading large blocks of fixed-income securities, and so on.

For instance, if the yield on a 6-month T-bill was 1.94% and the yield on a 10-year note was 2.81%. The spread during this time would be 87 basis points, or (2.81% - 1.94%). After a month, the half year bill yields 1.71%, while the 10-year note yields 2.72%. The spread is currently more extensive at 101 basis points (bp), or (2.72% - 1.71%), leading to a more extreme yield curve. This broadening of the spread between the two was brought about by the short term rates falling more than the long term rates (23bp to 9bp)

Bull steepeners are illustrated by a graph called the yield curve, which is a plot of all Treasury yields (from 90 days completely out to 30 years).

Bull Steepener versus Flattener

At the point when short-term or long-term interest rates change, the yield curve either straightens or steepens. At the point when the state of the curve flattens, this means the spread between long-term rates and short-term rates is limiting. This will in general happen when short-term interest rates are rising quicker than long-term yields, or put it 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 enlarges. A steepener contrasts from a flattener in that a steepener enlarges the yield curve while a flattener makes long-term and short-term rates draw nearer together. A steepening yield curve can either be a bear steepener or a bull steepener. A bear steepener will in general happen when interest rates on long-term bonds are rising quicker than rates on short-term bonds, leading to an extending of the difference between the two yields. Changes in long-term rates greaterly affect the yield curve than changes in short-term rates.

A bull steepener is portrayed by short-term rates falling quicker than long-term rates, expanding the difference among short-and long-term yields. At the point when the yield curve is supposed to be a bull steepener, it means that the higher spread is brought about by the short-term rates, not long-term rates. At the point when 2-year yields decline at a quicker rate than 10-year yields, for instance, a bull steepening yield curve happens.

Features

  • The long-finish of the yield curve is driven by a horde of factors, including — economic growth expectations, inflation expectations, and supply and demand of longer-development Treasury securities, among others.
  • The short-finish of the yield curve (which is commonly driven by the fed funds rate) falls quicker than the long-end, steepening the yield curve.
  • A bull steepener is a shift in the yield curve brought about by falling interest rates — rising bond prices — subsequently the term "bull."
  • A bull flattener is something contrary to a steepener — a situation of rising bond prices which makes the long-end fall quicker than the short-end. Bear steepeners and flatteners are brought about by falling bond prices across the curve.