If SHY is falling and TLT is rising, the yield curve is flattening.
The yield curve is flattening in America (the gap between the short-term federal funds rate and yields on ten-year Treasuries is only a smidgeon more than one percentage point) and in Britain it is inverted (long bonds yield less than shorter ones).
So much for the idea of a flattening yield curve bringing investors to the risk table.
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To exploit a flattening yield curve in a touchy investment environment, go with FLAT.
If you want to play the flattening yield curve, consider buying FLAT.
As this article is being written, 10-year Treasury yields have fallen to 2.98% and may be going even lower, creating a flattening yield curve spread.
What does seem clear, however, is that the flattening yield curve has already begun to punish banks and an inverted one would be likely to pummel them.
Bank stocks have not been terribly popular these days, as banks still suffer from re-regulation, bad loans, legal woes, and a flattening yield curve that squeezes their core profitability.
In all this, North Fork is not alone: regional banks have been more vulnerable than larger banks to the flattening yield curve because they tend to be more reliant on interest income.
What could be worse than the Fed's flattening the yield curve and stoking 1970s-style inflation?
Flattening the yield curve, the Fed has sought to ease credit conditions.
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With the goal of flattening the yield curve, the Fed may scoop up Treasuries in the hope of reigniting the equity and mortgage markets.
This takes money out of one pocket, pours it into another and ends up plain and simple flattening the yield curve, which is bad for the economy, not good.
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In other words, 50% of the FOMC dissented with Bernanke, at least in principle. (Read Operation Twist Set To Fail As Bernanke Insists On Flattening The Yield Curve).
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Regarding the effects of quantitative easing on savers, Bernanke acknowledged that flattening the yield curve eroded savings and caused hardship on some, but noted a weak economy was even more dangerous.
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But according to Takuji Aida, an economist at UBS in Japan, long-term yields remained very low because of deflationary expectations, thereby flattening the yield curve (the difference between short- and long-term interest rates).
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Yield on 10-year Treasuries breached the 2% mark on the downside and traded at record lows, as fearful investors rushed into Treasuries. (Read Operation Twist Set To Fail As Bernanke Insists On Flattening The Yield Curve).
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But the Federal Reserve had already started raising short-term interest rates, flattening the yield curve, the difference between short and long rates. (Since banks borrow short and lend long, their margins are higher when the curve is steep.) When this began eating into lenders' profits, they reacted by pushing subprime rates back up.
While the yield curve may sound like a wonkish concept reserved only for professional bond traders, retail investors can now profit from flattening and steepening in the curve, too.
It puts them at the flattening place in their power law curve of growth.
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