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The Mentor Journal
Bond Markets
All About Yield Curves, Bulls and Bears
Financial markets with a bull and bear symbol
By Chris Nelson
December 13, 2021
Reading Time: 3 minutes

I recently spoke with a community banker about yield curves and their slopes.  While he understood that yield curves could steepen or flatten, he’d heard someone referring to changes in the yield curve as “bull flatteners,” “bear steepeners,” or something similar.  I helped him understand the difference and wanted to share the same information with you.

Table of Contents

Yield Curves and Yield Curve Slope

Previously, I explored yield curves and yield curve slopes.  As a quick refresher, a normally sloped yield curve has rates that gradually increase as you go further in time.  Sometimes, the difference between short- and long-term rates can be very high, which we refer to as a steep yield curve.  When there’s minimal difference between the short- and long-end of the yield curve, that’s called a flat yield curve.

As interest rates on a given yield curve change over time, the yield curve’s slope can also change.  If the spread between short and long interest rates increases, we say the yield curve is steepening.  On the other hand, if the difference between short and long rates decreases, we say the yield curve is flattening. 

Introducing Bulls and Bears to the Mix

But what’s all this talk about bulls and bears, and how does it affect a yield curve’s slope?  Let’s look at an example.

Suppose we have a typical yield curve.  It has a positive slope, with rates gradually increasing as we move further out on the curve.

Now, let’s assume that the yield curve is going to steepen.  But wait a minute!  While we know it’s steepening, we don’t know if that’s because short-term interest rates are dropping or if long-term interest rates are going up.  No matter what happens, the yield curve will get steeper, right?

Chart showing how yield curves change, arrow showing steeper slope if short rates decrease or long rates rise

This is where the bull and bear terminology comes in.  The terms are associated with the stock markets.  We consider something bullish if it means that prices are rising, while a bearish situation involves prices falling. 

We can use the same terminology in the bond markets.  A bullish move means that bond prices are on the rise, while a bearish one means that bond prices are receding. 

If we go back to bond basics, we know that interest rates and bond prices move in the opposite direction when things change.  If interest rates rise, bond prices go down.  And when interest rates fall, then bond prices go up. 

Bull and Bear Steepeners

For example, if the reason a yield curve steepens is that short-term rates are dropping, that means that the price for shorter bonds is going up.  Since that’s bullish by definition, we refer to this as a bull steepener.  A bull steepener happens when short rates drop. 

On the other hand, if the steeper slope is due to an increase in long-term rates, that would indicate that long-term bond prices are falling, which is considered bearish.  So a yield curve that steepens because long-term rates are rising is called a bear steepener.

Bull and Bear Flatteners

We take a similar approach when the yield curve is flattening.  If the yield curve is getting flatter because long-term rates are coming down, that means the underlying bond prices are going up, which is bullish.  So when the yield curve flattens due to a decrease in long-term rates, that’s called a bull flattener. 

And if the yield curve is flattening because short-term rates are rising, then we’re looking at decreasing short bond prices, which is bearish.  So a bear flattener happens when short-term rates are on the increase.

So to recap:

A table showing the difference between yield curves

I hope this is helpful.  If you have any questions about it, please reach out!

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