The yield curve is the set of Treasury yields from short maturities to long. Its slope is usually measured as the long yield minus the short yield. When that gap grows the curve has steepened, and when it shrinks the curve has flattened. A headline that stops there leaves out the useful part.
Four moves, not two
A wider gap can come from the short end falling or the long end rising. A narrower gap can come from the short end rising or the long end falling. Traders attach bull to a move where yields are falling, since bond prices rise, and bear to a move where yields are rising.
That gives four cases: bull steepener, bear steepener, bull flattener and bear flattener. Each has a different driver.
Bull steepener
Short yields fall faster than long yields. This is the market pricing rate cuts. It can be benign, when inflation is cooling and the central bank can ease. It can also be a warning, when the cuts are expected because the economy is weakening. The curve cannot tell you which. The data that triggered the move usually can.
Bear steepener
Long yields rise faster than short yields. The policy outlook has not changed much, and investors are asking for more return to hold long bonds. The causes are usually worry about long-run inflation, heavy government borrowing, or weak demand at an auction, which Treasury auctions covers.
This is the case stock traders tend to watch most closely. Rising long yields raise the rate used to value future earnings, and there is no offsetting promise of easier policy. When yields spike describes how that reaches the index.
The two flatteners
In a bear flattener short yields rise faster than long, which is the market pricing hikes. In a bull flattener long yields fall faster than short, often a move toward safety or a lower view of long-run growth. An inverted curve, described in yield curve inversion, is where a long bear flattening ends up.
How to read it on the day
Look at the change in the two-year and the change in the ten-year separately before looking at the gap. Ask which moved more, and in which direction. The two-year yield carries the policy read. The ten-year carries everything else.
Then check what stocks did. Growth-heavy indexes tend to be more sensitive to the long end. Small caps tend to be more sensitive to the short end, since smaller companies rely more on short-term and floating-rate borrowing.
Where NoVo fits
NoVo does not chart the yield curve. The Trader dashboard shows how SPY, QQQ and IWM are positioned when rates move: net GEX, the gamma flip, the walls and the expected move, with Dr. NoVo’s written reads on each.