What Causes a Yield Curve to Flatten?

by Status_Flux

  1. The main reason for raising interest rates is to combat inflation. However the fed doesn’t actually set rates for short term bonds but rather sets the rates at which banks borrow from each other. This in turn affects demand for bonds, which is what changes the yield.
  2. The right side of the curve, from my understanding, is affected by demand. It gets pushed up when bonds become less attractive and down when they become more attractive. If you sell your 2% bond for 90% of what you paid for it, then the new yield on that bond is 1/0.9 better, if that makes sense. Because the interest is applied to the original price, but you bought the bond for less, so the percent yield is more. So when people sell bonds for less, the yield moves up, and vice versa. When the right side of the yield curve moves down, it indicates that more people are moving into bonds, since they have less faith in other investments. That’s generally not a good sign for the economy.
  3. When people refer to an inverted yield curve, they are usually referring to 2 year vs 10 year yield, iirc because those 2 notes are more actively traded than others. However, some people look at other comparisons too. Some areas of the yield curve are inverted, but the 2/10 is not, yet.