A trading in which the underlying is the yield curve. Traders and investors use various strategies to buy the interest rate differential between shorter- and longer-term interest rates when they anticipate the yield curve to steepen. When the yield curve steepens, interest rates for longer maturities increase more than interest rates for shorter terms as demand for longer-term financing goes up. Alternatively, short-term rates may fall while long-term rates remain relatively static. A steepener yield curve results in a wider interest rate differential between short-term and long-term interest rates.
On the contrary, traders and investors will sell the interest rate differential between shorter- and longer-term interest rates when they expect that the yield curve is about to flatten. When the yield curve flattens, interest rates for longer maturities decrease more than interest rates for shorter terms as demand for shorter-term financing moves up. Alternatively, short-term rates may hike while long-term rates remain relatively static. A flattener yield curve results in a narrower interest rate differential between short-term and long-term interest rates.
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