What Is Steepening and Flattening of the Yield Curve?

Two things happen to the curve on any given day: yields go up or down, and the gap between the long end and the short end widens or narrows. Those two facts combine into four regimes, and each one has a different cause, a different message and a different trade.

Ten short questions, answered one at a time.

1. What does steepening and flattening actually mean?

The yield curve plots yields across maturities, from the 2 year out to the 30 year. Steepening means the gap between long and short yields widens. Flattening means it narrows.

On its own that is only half the picture, because it tells you nothing about which direction yields moved. So read two things at once:

• Direction. Yields falling is a bull move, because bond prices rise. Yields rising is a bear move.
• Shape. The gap widening is a steepener. Narrowing is a flattener.

Combine them and you get four regimes, and every session is one of them. The most quoted single measure of the shape is the 2s10s spread, the 10 year yield minus the 2 year yield, in basis points. Our yield curve guide goes wider on what the shape signals.

2. What is a bull flattener?

Yields fall, and the long end falls more than the short end. The gap narrows.

This is demand for duration. Buyers reach further out the curve to lock in yield before it disappears, usually because they are worried about growth or because inflation expectations are easing.

The message is about the medium term rather than the next meeting. The market is saying growth and inflation look weaker further out, even though the central bank has not moved yet. It is a common late cycle pattern, and a sustained one is what eventually produces inversion.

3. What is a bear flattener?

Yields rise, and the short end rises more than the long end. The gap narrows.

This is the classic hawkish repricing, and the easiest of the four to recognise live. An upside inflation surprise lands, the market prices more tightening or fewer cuts, and the front end sells off hardest because it is the most direct expression of the policy path.

The long end rises less, because tighter policy now argues for lower growth and inflation later. If a hot CPI print produces a violent move in the 2 year and a muted one in the 30 year, you are watching a bear flattener.

4. What is a bull steepener?

Yields fall, and the short end falls more than the long end. The gap widens.

The dovish mirror of the bear flattener. Weak data lands, the market prices cuts sooner or deeper, and the front end rallies hardest for the same reason it sells off hardest on hawkish news: it tracks the policy path most directly. A soft payrolls print is the textbook trigger.

This is often the first curve move of an easing cycle, which is why a sustained bull steepening gets watched so closely. It is the market saying out loud that it has stopped believing in higher for longer.

5. What is a bear steepener?

Yields rise, and the long end rises more than the short end. The gap widens.

This is the one that is not really about the central bank, and that is the point worth holding onto. It is the long end demanding more compensation: rising term premium, heavy issuance, fiscal concern, or long run inflation worries.

A poorly received 30 year auction can produce one directly, which is why the tail on a long dated auction is worth watching even if you never trade bonds.

The practical distinction: a steepening led by the front end rallying is the market repricing the Fed. A steepening led by the long end selling off is the market repricing risk or supply. Same direction on a 2s10s chart, completely different cause, and they call for different trades.

6. How do you trade these with Treasury futures?

Start from the fact that futures prices move inversely to yields. Buying a contract is being long duration, and it profits when yields fall.

A steepener

You profit when long yields rise relative to short yields, which means the long maturity contract falls relative to the short maturity one. So you buy the short maturity contract and sell the long maturity contract. Buy ZT, sell ZN, for example.

A flattener

Exactly the reverse. Sell the short maturity contract and buy the long maturity contract. Sell ZT, buy ZN.

Note what these are and are not. Both are trades on the shape of the curve, not its direction. That only holds if the legs are DV01 weighted. Trade them one lot for one lot and you have quietly taken a directional position instead, which is the most common way a curve trade goes wrong for reasons that have nothing to do with the curve.

7. What is DV01, and why does it set the ratio?

DV01 is the dollar value of a one basis point move in yield, for one contract.

Every Treasury futures contract has a different one, because each tracks a different cheapest to deliver bond with its own maturity and conversion factor. A one basis point move is worth far more in the bond contract than in the two year, simply because there is more duration in it.

So you cannot trade curve spreads one for one. You size each leg so that both carry the same total DV01. A parallel shift in yields then nets out between the legs, and only the change in the spread shows up in your profit and loss, which is the entire point of the trade.

The ratio is straightforward:

• ratio = DV01 of the long maturity leg / DV01 of the short maturity leg

The catch is that DV01 is not fixed. The cheapest to deliver bond changes, and every contract's DV01 drifts with it, so the correct ratio changes too. Question ten covers where to get the current numbers.

8. Why does ZT need different treatment when charting?

This one catches out a lot of people, and it produces charts that quietly disagree with the position you are holding.

ZT carries double the notional

ZT, the 2 year note future, has a face value of $200,000. ZF, ZN, TN, ZB and UB all have $100,000. So one full point of price movement is worth twice as much in ZT as in any of the others.

Execution ratio and charting ratio are not the same number

Take the TUT spread as the working example.

• To execute it DV01 neutral, the ratio is roughly 2 x ZT - ZN.
• To chart it in price terms, the formula is 4 x ZT - ZN.

The doubling is the notional, not the position. You hold two ZT per ZN, and then you double again in the chart formula because each ZT point is worth twice each ZN point.

Chart 2 x ZT - ZN and you will get a line that does not match the profit and loss of the position you actually hold. The same doubling applies to every spread with a ZT leg, so it affects TUF and TUL as well as TUT.

9. What are TUF, TUT, FOB, NOB, BOB and TUL?

They are the standard nicknames for the listed inter-commodity spreads, each pairing two points on the curve.

• TUF. Two year against five year: ZT versus ZF.
• TUT. Two year against ten year: ZT versus ZN.
• TUL. Two year against the ultra long bond: ZT versus UB.
• FOB. Five year over bond: ZF versus ZB.
• NOB. Notes over bonds: ZN versus ZB.
• BOB. Bond over bond, the classic bond against the ultra bond: ZB versus UB.

In each case the shorter maturity is the front leg. Buying the listed spread generally means buying that front leg and selling the back one, which is a steepener, though it is worth confirming the convention on the contract specification rather than assuming.

Two things follow. Any spread with a ZT leg inherits the notional doubling from question eight. And the further apart the two legs sit on the curve, the more the spread is a bet on term premium and supply rather than on the Fed, so TUL and NOB behave quite differently from TUF.

10. Where do I get the correct weights and margin credits each quarter?

From the CME Group QuikStrike Treasury Analytics tool, under the inter-commodity spread section. It publishes the current weightings for each listed spread along with the margin credits the exchange applies.

This matters more than it sounds. The ratios are not fixed. The cheapest to deliver bond changes and every contract's DV01 moves with it, so a weighting that was correct last quarter can be wrong after the roll. Check it every quarter at rollover rather than carrying an old number forward, because a stale ratio turns a curve trade into a small directional one without telling you.

The margin point is worth knowing too. Trading the listed spread rather than legging in separately is what earns the recognised margin offset, so the same economic position can require materially different margin depending on how you put it on.

Where the terminal fits

Helious classifies the curve into exactly these four regimes automatically. Rather than reading one spread, it compares the average of the short leg against the average of the long leg, which catches moves led by the belly that a single 2s10s reading can hide, and it names the regime live on the rates board. Alongside it sits the calendar, every release scored against its own history the second it prints, the auction results that drive bear steepeners, and a live squawk. It is $39.99 a month with a free tier, and the methodology page shows the workings.

Where to go next

• Watch the curve live: the rates page and the 2s10s spread.
• Go deeper on shape: the yield curve guide, term premium and inversion.
• What moves each end: CPI and the FOMC hub for the front, Treasury auctions for the back.
• The units: basis points and duration.
• More reading: how to read Treasury auctions and what a basis point is.